TY  - JOUR
AU  - Gilchrist,Simon
AU  - Zakrajsek,Egon
TI  - Investment and the Cost of Capital: New Evidence from the Corporate Bond Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13174
PY  - 2007
Y2  - June 2007
UR  - http://www.nber.org/papers/w13174
L1  - http://www.nber.org/papers/w13174.pdf
N1  - Author contact info:
Simon Gilchrist
Department of Economics
Boston University
270 Bay State Road
Boston, MA  02215
Tel: 617/353-6824
Fax: NA
E-Mail: sgilchri@bu.edu

Egon Zakrajsek
Division of Monetary Affairs
Federal Reserve Board
20th Street & Constitution Avenue, NW
Washington, D.C. 20551
Tel: 202/728-5864
Fax: 202/452-2846
E-Mail: egon.zakrajsek@frb.gov
AB  - 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.
ER  -