Effect Of Monetary Policy On The Level Of Financial Investment Firm

Monetary policy instruments were frequently used by the People’s Bank of China, to maintain stable and healthy economic development in recent years. In fact, whether monetary policy actually regulates real economy depends on whether the transmission mechanisms are unobstructed, which has long been discussed by domestic and abroad scholars. However, previous studies were basically carried on from macro-perspective, without paying enough attention to the micro foundation of the transmission. In fact, monetary policy and firm behavior are mutually related and interacted. On the one hand, monetary policy is an indispensable factor of exterior economic environment, which cannot be ignored when firms make financing and investment decisions. On the other hand, the financing and investment behavior of firms also affects the effects of monetary policy. This paper attempts to investigate how debt conservatism helps corporate fend off the impact of tight monetary policy, increase their credit financing and investment level, which is known as financial flexibility, hopefully adding our knowing of credit channel, as well as enriching the finding in the field of interaction between macro-economic policy and micro-firm behavior.First of all, various transmission mechanisms of monetary policy are presented in this paper, as well as the explanations of debt conservatism in different theoretical frames, with special focus on credit channel and "financial flexibility" hypothesis of debt conservatism. Then, a mathematical model is established to explain how debt conservatism brings financial flexibility and helps companies to fend off monetary policy shock, so as to provide theoretical support for subsequent analysis.This paper selects728Chinese listed companies as sample from the first quarter in2003to the third quarter in2011. The sample is analyzed by panel data method in the empirical analysis part. The results suggest:(1) Generally speaking, tight monetary policy reduces the credit financing and investment level, which supports the effectiveness of credit channel from micro perspective.(2) Debt conservatism in expansion improves firm’s ability to gain credit and to invest in contraction significantly, which confirms the "financial flexibility" hypothesis.(3) The financial flexibility effect is robust to the property right characteristic of corporate, as well as the specification form of empirical model. Finally, we interpret empirical results from both macroeconomic policy formulation and corporate financial decision perspective. On the one hand, the behaviors of corporate can cause huge effects on the effectiveness of macroeconomic policy, which means it is necessary to take the game behavior of corporate into account when making up macroeconomic policy. On the other hand, debt conservatism can bring financial flexibility, which sheds some light on how can corporate fend off impact of monetary policy.