Implications of the Term Structure of Interest Rates for the Duration of Corporate Investment

The term structure of interest rates affects differently the value of corporate investments with different cash-flow duration. Exploiting plausibly exogenous variations in US government debt maturity, which generate changes in the term structure of interest rates, I show that lower long-term rates result in an increase in investment by firms in industries specialised in long-duration real investments relative to firms in industries specialised in short-duration real investments. A one standard deviation decrease in long-term US Treasury debt supply implies a redistribution of investment between public US firms of about 2% of total assets from long-investment duration industries to short-investment duration industries. I show that this finding also holds using within-industry and across-firms variation in the specialisation in long-duration investments. These results identify important real effects of policies which target the term structure of interest rates or its determinants