Volatility of the interest rate, debt and firm investment: Dutch evidence

H Bo, E Sterken*

*Corresponding author for this work

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    Abstract

    This paper analyzes the joint impact of the interest rate volatility and debt on firm investment. We derive an investment model taking account of the risk attitude of the owners of the firm. Using a panel of Dutch listed firms in the period of 1984-1995, we find that the cross-effect of the interest rate volatility and debt on investment is positive. This effect is more important for highly indebted firms than for less-indebted firms. The results are robust to different measures for the interest rate volatility. We interpret this finding by the tradeoff between the effect of the interest burden and the effect of debt revaluation. (C) 2002 Elsevier Science B.V. All rights reserved.

    Original languageEnglish
    Article numberPII S0929-1199(01)00031-1
    Pages (from-to)179-193
    Number of pages15
    JournalJournal of Corporate Finance
    Volume8
    Issue number2
    DOIs
    Publication statusPublished - Mar-2002

    Keywords

    • firm investment
    • interest rate volatility
    • debt
    • uncertainty measure
    • PRICE UNCERTAINTY
    • IMPACT

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