Working Paper

Debt, collateral, and U.S. manufacturing investment: 1954-1980

Abstract: I perform an empirical analysis of Euler equations for the firm's choices of capital, labor, hours, and debt. Financial structure has real effects , since taxes favor debt. However, the cost of debt increases with the debt-to-collateral ratio, and capital is part of collateral. The data, for U.S. manufacturing investment from 1954 to 1980, show that the debt-to-collateral ratio moves opposite to the direction suggested by tax rates. However, excluding the Euler equation for debt implies the correct sign for the relation between investment and the debt-to-collateral ratio. I also find structural instability in the Euler equations for debt and capital.

Keywords: Manufactures; Corporations - Finance;

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 1992

Number: 9210