Abstract
Iran’s financing system is primarily bank‑based, so the cost of capital largely depends on bank loan rates, which are administratively set by government executive orders. At times these loan rates have been lower than the inflation rate. This raises an important question: under these conditions, how does the cost of financing affect corporate investment? To explore this, I analyzed financial statements of 401 firms for the years 1383–1402 using a dynamic panel GMM estimator. The results show that the cost of financing has a negative and statistically significant effect on firms’ investment rates. Further analysis indicates that this effect is significant only when the real cost of financing is positive; it disappears when the real interest rate is negative. The findings also suggest that the financing rate’s impact on investments in fixed assets (machinery, land, and buildings) is smaller than its effect on investments in financial assets
Aim and Introduction:
Investment is a key driver of economic growth in developing countries, and Iran has experienced persistently low or negative investment rates over the past decade. Identifying the determinants of investment, therefore, is crucial for economic policy-making in Iran. A large body of literature emphasizes the cost of capital as a major determinant of firms’ investment decisions, with interest rate changes serving as a primary channel through which the cost of capital varies. In Iran, administrative ceilings on bank loan rates have often produced negative real lending rates when inflation outpaces nominal interest rates. This study investigates whether financing costs and bank loan rates influence corporate investment under these institutional conditions. In other words, this paper aims to address the question of whether the negative relationship between interest rates and investment rates remains significant in a situation where real interest rates are negative. Also, this paper investigates whether the effect of interest rate on investments depends on the type of investment..
Methodology:
The analysis is based on a firm-level panel of 401 companies listed on the Iranian stock markets, covering the period 2004–2023. The key variables—financing cost and investment rate—are constructed from firms’ financial statements. The Investment rate is obtained by dividing net capital expenditures by total assets.  Using data from cash flow statements, total investment is decomposed into investment in fixed assets and investment in financial assets. For financing cost, in addition to the bank loan rate (which is uniform across firms at each date), two firm-specific financing-rate indices are applied in the model to capture heterogeneity in financing rate. Although it has been shown that the average of both firm-specific financing-rate indices is highly correlated with the bank interest rate, and firm-level indices besides changes in the bank rate include heterogeneity at the firm level.  Firm-level uncertainty is computed following Gilchrist et al. (2014). The estimated empirical model is a dynamic investment equation:

Where   is firm i’s investment rate at time t;   denotes sales value to total assets;  represents operating cash flow to total assets,  is the firm-level uncertainty index,  is the firm-specific financing rate, and  and  represent industry and time fixed effects, respectively. The model is estimated using the Arellano–Bover/ Blundell–Bond GMM framework, with two-step estimates reported to improve efficiency..  
Results and Discussion:
The baseline results show that the financing rate exerts a negative and statistically significant effect on firms’ overall investment rates, which is consistent with the neoclassical theory of investment. To explore whether this effect depends on the real lending rate environment, the financing variable is interacted with dummy variables indicating periods of positive and negative real loan rates. The results reveal that the negative impact of financing costs on investment is restricted to periods of positive real loan rates and disappears when real rates turn negative. This finding remains credible when firm-level financing indices are used instead of the bank loan rate. According to the estimated coefficients of other variables (see Table 1), the uncertainty index has a significant negative effect on investment, while lower operating cash flow also reduces investment, which is consistent with internal-finance constraints. Comparing the effect of financial cost on different investment types shows that the elasticity of fixed-asset investment with respect to the financing rate is smaller than that of financial-asset investment. Thus, changes in loan rates affect firms’ financial investments more strongly than their tangible investments in machinery, land, and buildings. Moreover, fixed-asset investment exhibits stronger persistence: its lagged value is a significant predictor, implying that past capital commitments influence current investment decisions..
Conclusion:
This study examines the relationship between bank loan rates, firm-level financing costs, and corporate investment in Iran. The main contribution of this study is addressing this relationship under financial repression conditions (Interest rate ceilings and negative real interest rates) in a developing country.  The findings suggest that the effectiveness of interest rate on investment, as a key monetary transmission mechanism to the real economy, depends on the real interest rate regime. When nominal loan rates fall below inflation—yielding negative real lending rates—variations in financing costs or bank loan rates do not have a significant effect on investment activity. Consequently, contractionary monetary policy that raises nominal loan rates fails to generate the expected dampening effects on investment and output during periods of negative real interest rates. On the other hand, using expansionary monetary policy to stimulate the real sector through investment when the real interest rate is negative also cannot work. So, policymakers should therefore take the real-rate environment into account when evaluating the real-sector implications of interest rate adjustments.