INTEREST EXPENSES & FIXED CAPITAL FORMATION : A panel data study on 6 European countries under 3 different interest rate regimes

Abstract: This study aims to add analysis and discussion to how rising interest expenses affect fixed capital formation in different sectors in 6 heavy manufacturing European countries. To do this, firm-specific investment ratios are evaluated on firms with different financial stabilities and capital intensities in relation to firm-specific implied interest rates experienced from Q1 2017 to Q4 2022. The study uses a firm-level panel dataset from the ORBIS database and introduces a fixed-effects model with time dummy variables capturing different interest rate environments on the Euro area 10-year Government Benchmark bond yield. Findings show how higher implied interest rates negatively impacted the change in investment ratios for less capital-intensive firms but not for firms with higher capital intensities. Findings also suggest that firm-specific financial vulnerability amplifies the sensitivity investment ratios experience as rates rise.