Investment and the weighted average cost of capital: new ... · Investment and the weighted average cost of capital: new micro evidence for France J. Carluccio1 C. Mazet-Sonilhac1

Introduction Model Data Results Conclusion Appendix

Investment and the weighted average cost ofcapital: new micro evidence for France

J. Carluccio1 C. Mazet-Sonilhac1

J.S. Mesonnier1

1Banque de France

Very Preliminary. Please do not circulate.This version: February 5, 2018

Opinions expressed are those of the authors and do not necessarilyreflect the views of the Banque de France or the Eurosystem

Corporate Investment and WACC Carluccio/Mazet-Sonilhac/Mesonnier


Motivation

• Persistent slow growth environment in developed economiespost 2008, notably in the euro area.

• Corporate “investment deficit” often seen as a major cause.• low investment rate in France until 2014, recent upsurge, but

maybe partly fueled by temporary accelerated depreciationscheme (2015-2017)

• Reasons? ↓ expected demand (and heightened uncertainty), ↓competition, ↑ short-termism...

• What about financial factors? Too high cost of capital andhurdle rates in spite of lowered cost of debt (veryaccomodative MP)?

• cf. Villeroy de Galhau report (2016)



Subdued corporate investment in France since 2008?

80

85

90

95

100

105

110

1985 1990 1995 2000 2005 2010 2015

Two metrics of the gross investment rate (2008=100)

GI/VA GI/FA

GI/VA in 2016 = 24%

GI/FA in 2016 = 11,7%

Note. Source: INSEE. GI = Gross fixed capital formation of NFCs. VA = Gross VA of NFCs. FA = Net fixed capitalof NFCs.



Does the high CoE explain subdued investment?

Note. Cost of equity for large listed French NFCs as in Mazet-Sonilhac and Mesonnier (2016). Effect of sharebuybacks not included. Average corporate bond rate from Gilchrist and Mojon (2016). Interest rate on corporateloans: interest rate on new MFI loans to French NFCs above 1 M euros.



Main findings• We document the link between corporate investment and

Tobin’s Q components (among which the real WACC) usingFrench micro data for non-financial groups over 2003-2015.

• NB: Listed + Non-listed, Large + Small corporates

• Main findings:

• Strong negative correlation of firms’ investment with WACC.• No clear role for lower competition in contrast to the US case• Lower coefficient after 2008: margin constraints may dominate

post-crisis?• WACC more important for SMEs, less so for larger firms (in

particular post-2008).• At the sector-level, some role of the WACC in driving

investment in real estate and equipement, not in intellectualproperty. Some negative role of uncertainty for investment inEq. and IP.



Related Literature

• WACC (and cost of equity) matter for investment whenproperly measured: Franck & Shen (2016), Melolinna, Miller& Tatomir (2017)

• Investment-less growth in the US since 2000s reflectsshort-termism of some II and lower competition: Philippon &Gutierrez (2017)

• Share buybacks explain disconnect between Q, net fundingand investment in the US since late ’90s: Lee, Shin, Stulz(2016)

• High COE and low interest rates, a cause of carry trade andshare buybacks: Blundell-Wignall & Roulet (2013), Acharya &Plantin (2017)

• Net lending (saving − investment) by NFCs in US andGermany, but not in France: Gruber & Kamin (2015)



Empirical model

• Regressions motivated by a simple Q-model of investment,following Franck & Shen (JFE, 2016).

• Firm chooses I to max NPV, constrained by K accumulationand K-adjustment cost ⇒ It

Kt= − 1

φ + qtφ

• Using symplifying assumptions (Abel & Blanchard, 1986):

IitKit−1

= β0 + β1Profitsit

Kit−1

+ β2 (Lit ∗ (1− τit) ∗ CoDit + (1− Lit) ∗ CoEit)︸︷︷︸WACCit

+ θXit + δt + γf + εit

with leverage Lit = Gross Debt / [Gross Debt + Equity].



Data• Consolidated BS data for some 7,510 French corporate

groups (hereafter: firms) from BdF’s FIBEN Groupesdatabase over the period 1990-2015

• Stock market information for ≈ 600 listed corporates(Datastream, BdF-DE) =⇒ sector-specific measure of COE(DS industries matched into NAF-2 A38 sectors)

• Sector-level (A38) information on fixed capital formationand consumption by asset type (real estate, equipment,intellectual property), from INSEE

Cleaning ⇒ 2,482 corporate groups over 2003-2015(≈ 200 are listed). Average cross-section: ≈ 1, 100 corporategroups (Smaller: 600 / Larger: 1400). Average # consecutiveyears per group: 5,7. Cleaning details



Variable construction

• Firm-level measure of the WACC:• Sector-level (NAF-2/A88) measures of nominal COE using

DDM H-model for listed groups in each sector. COE details

• Firm-level apparent cost of debt, leverage and tax rate.• Deflator of COE, COD, WACC: core HICP.

• Firm controls: size, depreciation rate, investment intofinancial assets, M&A dummy.

• Sector-level controls (A38):• Herfindahl index of firms’ sales (using FIBEN database for

legal entities) Competition

• Uncertainty (sector-year dispersion in ROA) Uncertainty

• Sector-level measures of investment by asset type:• Investment and depreciation rates in intangibles (IP) vs

equipment (EQ) vs real estate (RE)



Micro Data: descriptive statistics

Variable N mean sd p10 p25 p50 p75 p90

Investment rate (I/FA−1) 13,825 0.14 0.14 0.03 0.05 0.10 0.17 0.29Net Investment rate (NI/FA−1) 13,825 0.06 0.19 -0.07 -0.02 0.02 0.09 0.21Depreciation rate δ (DEP/FA−1) 13,825 0.11 0.11 0.03 0.06 0.09 0.13 0.21Cash-flows to Fixed Assets (OIBDP/FA−1) 13,825 0.34 0.43 0.08 0.14 0.22 0.37 0.65

Nominal Cost of Debt 13,825 0.046 0.044 0.018 0.028 0.039 0.053 0.072Nominal Cost of Equity 13,825 0.078 0.028 0.053 0.061 0.071 0.089 0.115WACC 13,825 0.056 0.019 0.035 0.043 0.053 0.065 0.079Real Cost of Debt (CoD) 13,825 0.030 0.044 0.001 0.012 0.024 0.037 0.056Real Cost of Equity (CoE) 13,825 0.062 0.029 0.034 0.043 0.057 0.072 0.104(1 - τ) * CoD 13,825 0.021 0.031 0.001 0.008 0.016 0.026 0.039Real WACC 13,825 0.042 0.019 0.021 0.029 0.039 0.051 0.067Tax rate τ (Apparent, sector level) 13,825 0.31 0.12 0.23 0.28 0.31 0.34 0.37Leverage (Debt / Equity + Debt) 13,825 0.43 0.21 0.14 0.27 0.44 0.59 0.72

Firm size (TA) 13,825 752,451 8,674,926 19,412 30,430 56,751 141,020 385,606Firm age 13,825 26.4 26.4 5.0 9.0 18.0 34.0 62.0Investment in financial assets (IFI/FA−1) 13,825 0.001 0.014 -0.000 0.000 0.000 0.000 0.002

Note. Sample of 2,482 corporate groups (firms) over 2003-2015. Gross investment: acquisitions minus cession offixed assets, net investment: gross investment minus depreciation and amortization, Cash-flows: Operating IncomeBefore Depreciation (EBITDA), the (firm-specific) implied cost of debt: interest payments normalized by gross long-term debt and leverage: D/(D+E). CoE: computed at the sector level for 49 sectors with a DDM H-Model. Nominalreturns are deflated using the french core HICP



Distribution of estimated WACC

Figure 1 : WACC at sector-level (Real vs Nominal)



Real WACC, CoE and CoD in our sample

Figure 2 : Median per year of real WACC, COE and COD (firm-level)



Sample validation: micro vs macro

Figure 3 : Gross investment measured by macro and micro data

Note. Gross investment rate (I/FA−1): ratio of gross fixed capital formation to fixed assets. French corporates

over the period 2004-2015. Macro data (INSEE national accounts) and our sample of micro data (BdF’s FIBENGroupes).



Is the Q-model of I vindicated? A preliminary test basedon listed firms

I/FA Q I/FA(1) (2) (3) (4) (5) (6)

Tobin’s Q 0.033∗∗ 0.027∗

(0.016) (0.016)

Cash-flows (OIBDP/FA) 0.119∗∗∗ 0.108∗∗∗ 0.085∗∗∗ 0.080∗∗∗

(0.041) (0.033) (0.015) (0.015)

Real WACC -1.520∗ 0.376 -0.432∗∗ -0.037(0.874) (0.830) (0.168) (0.216)

Depreciation rate 0.171∗∗ 0.180∗∗∗ 0.063 0.073(0.068) (0.069) (0.057) (0.058)

Firm FE Yes Yes Yes Yes Yes YesYear FE No Yes No Yes No YesFirm controls Yes Yes No No Yes YesObservations 1,475 1,475 1,475 1,475 1,475 1,475R-Square 0.68 0.69 0.75 0.78 0.70 0.70

Note. OLS regressions. Sample period: 2003-2015. Unbalanced panel of listed corporate groups only. Tobin’s Q is[Total assets + market value of equity - book value of equity] / total assets. Firm controls: depreciation over laggedfixed assets, log size, a dummy for M&A activity and purchases of financial assets. Standard errors in parenthesesare clustered at the firm level.



Investment and the WACC: baseline results

Investment rate(1) (2) (3) (4) (5) (6) (7)

Cash-flows (OIBDP/FA) 0.089∗∗∗ 0.084∗∗∗ 0.072∗∗∗ 0.071∗∗∗ 0.070∗∗∗ 0.075∗∗∗ 0.075∗∗∗

(0.007) (0.007) (0.008) (0.008) (0.008) (0.008) (0.008)

Real WACC -0.758∗∗∗ -0.820∗∗∗ -0.717∗∗∗

(0.084) (0.103) (0.103)

Real CoD * (1 - τ) -0.274∗∗∗ -0.239∗∗∗

(0.054) (0.053)

Real Cost of Equity -0.085 -0.088∗

(0.052) (0.051)

Leverage 0.073∗∗∗ 0.061∗∗∗

(0.015) (0.015)

Firm FE Yes Yes Yes Yes Yes Yes YesYear FE No Yes Yes Yes Yes Yes YesFirm controls No No Yes Yes Yes Yes YesObservations 13,814 13,814 13,814 13,814 13,814 13,814 13,814R-Square 0.53 0.53 0.54 0.54 0.54 0.54 0.54

Note. OLS regressions. Sample period: 2003-2015. Unbalanced panel of all firms in our sample. Dependentvariable: gross fixed capital investment rate (I/FA−1). Firm controls: depreciation over lagged fixed assets, logsize, a dummy for M&A activity and purchases of financial assets. Sector controls: competition and uncertainty.Standard errors in parentheses are clustered at the firm level.



Do competition and uncertainty matter?

Investment rate(1) (2) (3) (4) (5)

Cash-flows (OIBDP/FA) 0.072∗∗∗ 0.079∗∗∗ 0.079∗∗∗ 0.079∗∗∗ 0.072∗∗∗

(0.008) (0.008) (0.008) (0.008) (0.008)

Real WACC -0.717∗∗∗ -0.745∗∗∗ -0.747∗∗∗ -0.746∗∗∗ -0.719∗∗∗

(0.103) (0.085) (0.085) (0.085) (0.103)

Concentration -0.115 -0.115 -0.059(0.122) (0.122) (0.119)

Uncertainty 0.006 0.006 0.007(0.015) (0.015) (0.015)

Firm FE Yes Yes Yes Yes YesYear FE Yes No No No YesFirm controls Yes Yes Yes Yes YesObservations 13,814 13,814 13,812 13,812 13,812R-Square 0.54 0.53 0.53 0.53 0.54

Note. OLS regressions. Sample period: 2003-2015. Unbalanced panel of all firms in our sample. Dependentvariable: gross fixed capital investment rate (I/FA−1). Firm controls: depreciation over lagged fixed assets, logsize, a dummy for M&A activity and purchases of financial assets. Sector controls: competition and uncertainty.Standard errors in parentheses are clustered at the firm level.



Cost of capital matters less post-2008 (and profits/demandmore)...

Investment rate≥ 2003 03− 08 09− 15 ≥ 2003

Cash-flows (OIBDP/FA) 0.072∗∗∗ 0.042∗∗∗ 0.083∗∗∗ 0.070∗∗∗

(0.008) (0.014) (0.012) (0.009)

Post-2008 x cash-flows 0.005(0.008)

Real WACC -0.719∗∗∗ -0.918∗∗∗ -0.585∗∗∗ -1.192∗∗∗

(0.103) (0.195) (0.133) (0.171)

Post-2008 x real WACC 0.639∗∗∗

(0.175)

Firm FE Yes Yes Yes YesYear FE Yes Yes Yes YesFirm controls Yes Yes Yes YesSector controls Yes Yes Yes YesObservations 13,812 4,551 8,950 13,812R-Square 0.54 0.56 0.58 0.54

Note. OLS regressions. Sample period: 2003-2015. Unbalanced panel of all firms in our sample. Dependentvariable: gross fixed capital investment rate (I/FA−1). SMEs: staff < 250 and sales < 50 M euros (or assets <

43 M euros). Mid-Size: staff < 5,000 and sales < 1.5 bn euros (or assets < 2 bn euros). Large firms: abovethese thresholds. Firm controls: depreciation over lagged fixed assets, log size and a dummy for M&A activityand purchases of financial assets. Sector controls: competition and uncertainty. Standard errors in parentheses areclustered at the firm level.



Coefficient break larger for large firms

Small Mid - Large≥ 2003 03− 08 09− 15 ≥ 2003 ≥ 2003 03− 08 09− 15 ≥ 2003

Cash-flows (OIBDP/FA) 0.054∗∗∗ 0.029 0.066∗∗∗ 0.041∗∗ 0.085∗∗∗ 0.063∗∗∗ 0.090∗∗∗ 0.086∗∗∗

(0.013) (0.028) (0.016) (0.017) (0.010) (0.015) (0.014) (0.010)

Post-2008 x cash-flows 0.023 -0.001(0.017) (0.010)

Real WACC -0.898∗∗∗ -1.000∗∗ -0.622∗∗ -1.417∗∗∗ -0.573∗∗∗ -0.674∗∗∗ -0.519∗∗∗ -1.097∗∗∗

(0.209) (0.407) (0.253) (0.369) (0.112) (0.184) (0.141) (0.180)

Post-2008 x real WACC 0.655∗ 0.720∗∗∗

(0.365) (0.187)

Firm FE Yes Yes Yes Yes Yes Yes Yes YesYear FE Yes Yes Yes Yes Yes Yes Yes YesFirm and sector controls Yes Yes Yes Yes Yes Yes Yes YesObservations 5,353 1,578 3,610 5,353 8,255 3,196 5,373 8,255R-Square 0.53 0.54 0.57 0.54 0.58 0.61 0.62 0.58

Note. OLS regressions. Sample period: 2003-2015. Unbalanced panel of all firms in our sample. Dependentvariable: gross fixed capital investment rate (I/FA−1). SMEs: staff < 250 and sales < 50 M euros (or assets <

43 M euros). Mid-Size: staff < 5,000 and sales < 1.5 bn euros (or assets < 2 bn euros). Large firms: abovethese thresholds. Firm controls: depreciation over lagged fixed assets, log size and a dummy for M&A activityand purchases of financial assets. Sector controls: competition and uncertainty. Standard errors in parentheses areclustered at the firm level.



Cost of capital and investment by asset-type: sector-levelregressions

Total Capex Capex by asset typeInvTot / FA InvTot / FA InvEQ / EQ InvRE / RE InvIP / IP

Cash Flows (Sector, OIBDP/FA) 0.038∗∗∗ 0.040∗∗∗ 0.114∗∗∗ 0.023 0.050∗∗∗

(0.014) (0.013) (0.031) (0.014) (0.017)

Real WACC -0.109∗ -0.072 -0.165 -0.136∗∗ 0.018(0.064) (0.064) (0.103) (0.062) (0.063)

Depreciation rate 2.019∗∗∗ 1.918∗∗∗ 0.100∗∗∗ 2.283∗∗∗ 0.137∗∗∗

(0.147) (0.143) (0.018) (0.375) (0.042)

Uncertainty -0.005 -0.024∗∗ 0.009 -0.007∗

(0.005) (0.009) (0.006) (0.004)

Concentration -0.092∗∗∗ -0.142∗∗∗ -0.023 0.106∗∗

(0.018) (0.045) (0.018) (0.047)

Inv. in RE. 0.568∗∗∗ 0.001(0.164) (0.040)

Inv. in PI. 0.041 -0.032(0.108) (0.052)

Inv. in Eq. 0.141∗∗∗ 0.039(0.053) (0.038)

Sector FE Yes Yes Yes Yes YesYear FE Yes Yes Yes Yes YesObservations 310 306 306 306 306R-Square 0.93 0.94 0.85 0.90 0.89

Note. OLS regressions over 2003-2015, NACE rev. 2 industries (A38). Sector-level variables from National Accounts,except WACC (aggregated as sector-level from firm-level data). Standard errors in parentheses are clustered at thesector level. EQ stands for investment into machinery and equipment, IP stands for investment in intellectual property(including R&D), RE stands for investment into real estate assets.



Conclusion• We document negative role of WACC for corporate

investment in France since 2003 for a large sample of mostlyunlisted corporations.

• No clear role for competition 6= earlier findings for the US• Some role for uncertainty regarding investment in IP/Eq. at

sector-level

• Post 2008: weakened role of cost of capital• Relatively high cost of capital has weighed down on investment

into fixed assets for SMEs, but less so for large, listedcorporations.

• Increased role for low margins and cash flows during thepost-2008 slump?

• Caveat: mere correlations, no causal claims here.• Further research: collect genuine info on hurdle rates and

premia?• Indeed, the latter may be large (5− 8%) (US: Jagannathan et

al., JFE 2016, UK: Melolinna et al., BoE 2017).



Appendix



Data cleaning

• Drop farm, mining, financial services, real estate

• Drop years before 2003: not enough groups in cross-section

• Drop observations w/ missing or negative values of FA, Inv,TA, Equity

• Drop observations in top 1% / bottom 1% of investment rateand CoE.

• Drop firms w/ investment rates (corrected for year fixedeffects) below 10th percentile.

• Impose at least 3 consecutive years

⇒ 2,482 corporate groups over 2003-2015 (≈ 200 are listed).Average cross-section: ≈ 1, 100 corporate groups (Smaller: 600 /Larger: 1400). Average # consecutive years per group: 5,7.

Cleaning details

Back



Data: Cost of Equity

• We construct (NAF-2/A38) sector-level measures of the (real)cost of equity to compute the (real) WACC (deflator: coreHICP).

• Nominal COE estimated based on a standard DividendDiscount Model (H-Model, Fuller and Shia, 1983):

CoEt =Dt

Pt−1∗ ((1 + gLT ) +

H

2((gST )− gLT )) + gLT

• DY : 2-digit sector average of in-sample listed firms’ DY (A38)

• gLT : nominal GDP growth, 10 years forecast (source: SPF)

• gST : Datastream sector-level expected profit growth, 3-5 years forecast (source:I/B/E/S), mapped into NACE-2 sectors.

• H : 8 years

Back



Cost of equity

Figure 4 : Cost of equity at sector-level (Real vs Nominal)

Back



Cost of Debt

Figure 5 : Cost of debt at sector-level (Real vs Nominal)

Back



Competition

Figure 6 : Firm concentration at A38 sector-level (Sector Herfinhdal)

Back



Uncertainty

Figure 7 : Uncertainty at A38 sector-level

BackCorporate Investment and WACC Carluccio/Mazet-Sonilhac/Mesonnier

Documents

Investment and the weighted average cost of capital: new ... · Investment and the weighted average cost of capital: new micro evidence for France J. Carluccio1 C. Mazet-Sonilhac1