The Insensitivity of Investment to Interest Rates: Evidence from a Survey of CFOs

42 Pages Posted: 30 Jan 2014  

Steven A. Sharpe

Federal Reserve Board - Research & Statistics

Gustavo Suarez

Board of Governors of the Federal Reserve System

Date Written: December 3, 2013

Abstract

A fundamental tenet of investment theory and the traditional theory of monetary policy transmission is that investment expenditures by businesses are negatively affected by interest rates. Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment. In this paper, we examine the sensitivity of investment plans to interest rates using a set of special questions asked of CFOs in the Global Business Outlook Survey conducted in the third quarter of 2012. Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases. Most CFOs cited ample cash or the low level of interest rates, as explanations for their own insensitivity. We also find that sensitivity to interest rate changes tends to be lower among firms that do not report being concerned about working capital management as well as those that do not expect to borrow over the coming year. Perhaps more surprisingly, we find that investment is also less interest sensitive among firms expecting greater revenue growth. These findings seem to be corroborated by a cursory meta-analysis of average hurdle rates drawn from firm-level surveys at different times over the past 30 years, which exhibit no apparent relation to market interest rates.

Keywords: Investment, interest rates, hurdle rates

JEL Classification: E22, E52, G31

Suggested Citation

Sharpe, Steven A. and Suarez, Gustavo, The Insensitivity of Investment to Interest Rates: Evidence from a Survey of CFOs (December 3, 2013). FEDS Working Paper No. 2014-02. Available at SSRN: https://ssrn.com/abstract=2386895 or http://dx.doi.org/10.2139/ssrn.2386895

Steven A. Sharpe

Federal Reserve Board - Research & Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)

Gustavo Suarez (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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