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Investment and the cost of capital : new evidence from the corporate bond market

Author: Simon Gilchrist; Egon Zakrajšek; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2007.
Series: Working paper series (National Bureau of Economic Research), no. 13174.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
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  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Simon Gilchrist; Egon Zakrajšek; National Bureau of Economic Research.
OCLC Number: 144608903
Description: 1 online resource (1 volume).
Series Title: Working paper series (National Bureau of Economic Research), no. 13174.
Responsibility: Simon Gilchrist, Egon Zakrajsek.

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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