Firms' Investment and the Real Transmission of the Global Financial Cycle

We study how global financial conditions transmit to firms’ investment. We document that increases in risk premia are followed by large investment contractions, particularly among firms with higher default risk. We develop a quantitative heterogeneous-firm open-economy model where firms finance investment with defaultable debt priced by risk-averse global investors. We identify a strong risk channel linking changes in the global price of risk to financing costs through firms’ quantity of risk—the sensitivity of debt repayment to global shocks. This introduces a risk dimension to stabilization policy: smoothing cash flows reduces firms’ quantity of risk and dampens international financial transmission.