Impact of Interest Rate Fluctuations on Investment Decisions and Corporate Valuation

Abstract

Interest rate changes are among the most important factors that determine the main investment strategies and affect the value of companies in both developed and emerging markets. Changes in interest rates have a direct impact on the cost of capital, the borrowing capacity, and the risk perception of an investor. This leads to variations in capital budgeting decisions and market valuations. This paper explores the connection between changes in interest rates and corporate investment using theoretical and empirical perspectives. The work at hand combines macroeconomic data, financial statements of companies, and the opinions of experts to measure the effect of a change in interest rates on the calculations of net present value, the stock market, and the long-term management of the company. The results show that an increase of rates is usually followed by a decrease of free cash flow and lower share prices, whereas a decrease in rates leads to a rise in capital expenditure and may cause a higher vulnerability to asset bubbles. The article also discusses the differences in the degree of the impact of the interest rate changes on particular industrial sectors, saying that the ones which have a lot of fixed capital are the most affected by rate changes. The companies that have a lot of fixed capital-intensive industry are the ones that will be affected the most. Besides these revelations, the paper also lays open the practical points of corporate managers, investors, and policymakers that are trying to harmonize growth with financial stability.