Monetary Policy Shocks,Financial Heterogeneity And Corporate Dynamic Investment Activity

This study evaluates the differential responses of firms' investment to monetary policy shocks conditional on different measures of their financial heterogeneity.Using Compustat data and high-frequency event-study approach,the aim of the study is to examine the role of financial conditions of firms in deciding investment dynamic to monetary policy shocks.To construct the monetary policy shocks measured as surprise movements,changes in the various interest rates futures around a policy announcement of Federal Open Market Committee(FOMC)have been used in this study.Considering leverage and cash holding as explanatory financial variables,Firms with low leverage and high cash holding react more to monetary policy shocks in explaining the differenced investment levels of the firms.The interactions of the two monetary policy shock variables are statistically insignificant for the high leverage firms and low cash holding firms but they are statistically significant for the low leverage firms and high cash holding firms.When controlling for both the relevance of leverage and cash holding the causal impact cash holding has a higher standard deviation impact on the differenced investment of the firms relative to one-period leverage impact i.e.the latter one has the higher impact on firms' investment level.High cash holding of a firm also improves investment efficiency during a contractionary monetary policy period.This study enhances the literature of corporate investment behavior which can be helpful for developing and optimizing macro-control policies.