How Federal Reserve Interest Rate Policy Impacts Corporate Financing Decisions

Andrii Oliinyk

Co-Presenters: Individual Presentation

College: College of Business and Public Management

Major: BS.FINANCE

Faculty Research Mentor: Huaibing Yu

Abstract:

This research looks at how the Federal Reserve's interest rate policy affects company financing decisions in the United States. Changes in the federal funds rate have a direct impact on the cost of borrowing, which in turn influences a company's weighted average cost of capital (WACC), capital structure, and investment strategy. When interest rates rise, the cost of debt financing rises, typically prompting businesses to lower leverage, postpone capital expenditures, or switch to equity financing. Lower interest rates, on the other hand, stimulate borrowing, refinancing, and expansion via debt-financed initiatives. The study examines how monetary policy influences corporate finance decisions, with an emphasis on capital budgeting, bond issuance, stock buybacks, and merger activity. It also assesses how interest rate assumptions affect management decisions and corporate valuation. This study examines historical rate cycles and company behaviour during tightening and relaxing phases to demonstrate the larger economic effects of monetary policy for business growth and financial risk-taking. Understanding this link is crucial for finance professionals because it shows how macroeconomic policy decisions affect firm-level financial strategy and long-term shareholder value development.