Research On The Relationship Between Monetary Policy And Corporates’ Financing And Investment Decision

In the first half year of2007, economic growth in China has gradually turnedfrom quickly to overheating, firms appear to be overinvestment and capital marketalso appear larger fluctuation. In order to restrain economic growth from overheating,the government macroeconomic regulation and control measures in a timely manner,changed the monetary policy which has been in use for9years, began to tight themonetary policy. Soon in tightening monetary policy, American faced with thesubprime mortgage crisis in2007, and gradually evolved into the financial crisis in2008, and quickly spread around the world, which impact the financial market andreal economy in many countries on different degree. In the shadow of the financialcrisis, firms started to inadequate investment. In order to alleviated the impact ofAmerican financial crisis on Chinese real economy, China develop a4trillioneconomic stimulus plan, adjust the monetary policy timely, from austerity to loose,to stimulate the development of economy and resist the impact of the financial crisisin the United States.Traditional research keep the view that loose monetary policy can reduce thecost of capital, thus increase the investment expense. However, recently manyresearchers find that, monetary policy’s transmission mechanism on firm’sinvestment is not directly, but through the changing of the firm’s financing level toaffect the investment decisions of the firms.The adjustment of the monetary policynot only change the entire capital market supply of funds, and will change the firm’sability of external financing, in turn, affect the enterprise’s investment levels. Thisarticle explore the effect of monetary policy to the company financing constraints indeep from the theory of credit rationing, devt overhang and the market timing theory. In order to verify the effect of the different firms with different financingconstraints under different monetary policy, in the empirical part, the article chooseChinese listed companies’ panel data during1999to2006as the research sample,using the financial indicators to calculate Altman Z value of each company in eachyear. According to the calculated Altman Z score, we ordered the firm from small tolarge, the top one-third of the sample are the financial constrained group, the middlethird part is partial financing constrained group, and the last one-third is not financialconstrained group. The article carries on the regression analysis using FHP(1988)investment model which has been revised investment model by Cleary(1999), theresult state that, in different financial constrained groups, the coefficient of the cashflow are increasing with the increased level of the financial constrained, whichindicates that for higher level of the financial constrained companies, the cost offinancing is higher, it’s more difficult to finance, under this situation, the enterpriseis more dependence on its internal cash flow. Then, the article analyse the differentmonetary police during different periods, examine the influence on differentfinancial constraints firm’s investment level under different monetary policy.Research has found that firms with financial constraints under tighten monetarypolicy has the most sensitivity of investment-cash flow, and firms with no financialconstraints under steady monetary policy has the most sensitivity of investment-cashflow.