Investment and the Cost of Capital: New Evidence from the Corporate Bond Market

Simon Gilchrist · Egon Zakrajšek

108 citations0/0 files storedNational Bureau of Economic Research

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Corporate Finance and Governance Financial Markets and Investment Strategies Capital Investment and Risk Analysis

Abstract

We study the effect of variation in interest rates on investment spending, employing a large panel data set that links yields on outstanding corporate bonds to the issuer income and balance sheet statements.The bond price data --based on trades in the secondary market --enable us to construct a firm-specific measure of the user cost of capital based on the marginal cost of external finance as determined in the market for long-term corporate debt.Our results imply a robust and quantitatively important effect of the user cost of capital on the firm-level investment decisions.According to our estimates, a 1 percentage point increase in the user cost of capital implies a reduction in the investment rate of 50 to 75 basis points and, in the long run, a 1 percent reduction in the stock of capital.

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1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1974On the Pricing of Corporate Debt: The Risk Structure of Interest Rates 2001The Determinants of Credit Spread Changes 1967Tax Policy and Investment Behavior 2001Explaining the Rate Spread on Corporate Bonds 2005An Empirical Analysis of the Dynamic Relation between Investment‐Grade Bonds and Credit Default Swaps 1994A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments 1986The Present Value of Profits and Cyclical Movements in Investment

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