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“How relevant is capital structure for aggregate investment? a regime-switching approach”

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  • Simmons-Süer, Banu

Abstract

This paper attempts to show how the cost of capital influences the non-linear interaction between investment and Tobin's q by affecting the probability of regime-switches. Treating the US non-farm, non-financial corporate sector as a representative firm and calculating a cost of capital by weighting the respective costs of equity and debt financing, our estimation results shed light on the periods of low capital expenditure, which are picked up neither by Tobin's q nor by the real interest rate. The findings challenge the concept of the ‘irrelevance of dividends/capital structure’.

Suggested Citation

  • Simmons-Süer, Banu, 2018. "“How relevant is capital structure for aggregate investment? a regime-switching approach”," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 109-117.
    • Handle: RePEc:eee:reveco:v:53:y:2018:i:c:p:109-117
    DOI: 10.1016/j.iref.2017.10.002
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    More about this item

    Keywords

    Investment; Tobin's q; WACC; Regime-switching;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G3 - Financial Economics - - Corporate Finance and Governance

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