Monetary Policy, Corporate Finance and Investment

Abstract

We provide new evidence on how monetary policy affects investment and fi rm fi nance in the United States and the United Kingdom. Younger fi rms paying no dividends exhibit the largest and most signifcant change in capital expenditure -even after conditioning on size, asset growth, Tobin's Q, leverage or liquidity -and drive the response of aggregate investment.Older companies, in contrast, hardly react at all. After a monetary policy tightening, net worth falls considerably for all fi rms but borrowing declines only for younger non-dividend payers, as their external fi nance is mostly exposed to asset value fl uctuations. Conversely, cash-fl ows change less markedly and more homogeneously across groups. Our fi ndings highlight the role of fi rm fi nance and fi nancial frictions in amplifying the effects of monetary policy on investment.Keywords: monetary policy, fi nancial frictions, fi rm fi nance, investment.JEL classifi cation: E22, E32, E52. ResumenEn este trabajo se presenta nueva evidencia acerca del efecto que la política monetaria tiene sobre la inversión y la fi nanciación de las empresas en Estados Unidos y en el Reino Unido.Las empresas más jóvenes y que no pagan dividendos son las que muestran la mayor, -y estadísticamente signifi cativa-, reacción en términos de inversión en capital fi jo, mientras que las empresas relativamente antiguas casi no presentan reacción alguna. Esto es así aun controlando por características tradicionales en esta literatura, como son el tamaño, el crecimiento en activos, la valuación, el apalancamiento y liquidez. La reacción de empresas jóvenes que no pagan dividendos explica el movimiento de la inversión agregada. Después de una contracción en la política monetaria, se observa una reacción de la valuación de todas las empresas, mientras que la deuda responde solo para aquellas empresas jóvenes que no pagan dividendos. Esto se debe a que estas últimas son las más expuestas a cambios en el valor del colateral a la hora de endeudarse. Por otro lado, se observa también una reacción en los fl ujos de caja, aunque dicha reacción es relativamente pequeña y homogénea entre empresas. Estos resultados resaltan la importancia de la estructura fi nanciera, así como de las fricciones en la fi nanciación externa de las empresas, en la amplifi cación de los efectos de la política monetaria sobre la inversión empresarial.Palabras clave: política monetaria, fricciones fi nancieras, fi nanciación empresarial, inversión.

Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment

“…These results complement recent work analyzing how firm characteristics can influence the effects of monetary shocks on investment including Cloyne et al (2019), Crouzet and Mehrotra (2020), Jeenas (2019), and Ottonello and Winberry (2020), and have two important implications. First, they suggest policymakers should pay particularly close attention to the balance sheets of financially constrained firms when trying to use monetary policy as a tool to stabilize business cycles, as binding financial constraints can actually prevent them from adjusting and instead lead to increased investment in other, less-constrained sectors.…”

Monetary Policy and Intangible Investment

“…Verification Figure A1 verifies that the response of standard macroeconomic variables to a monetary policy shock in our setup is in line with that documented in the literature. In response to a 25bps increase in the instrumented 1-year Treasury rate, CPI drops by 0.2-0.3% (somewhat stronger than -0.15% in Gertler and Karadi ( 2015)), employment drops by 0.2% (similar to -0.25% in Cloyne et al (2018)), excess bond premium increases by 10 bps (similar to Gertler and Karadi (2015)), industrial production drops by 0.7% (similar to the 0.6% in Cloyne et al (2018)), and aggregate business investment drops by 2% (in line with Cloyne et al…”

“…The second strand is the literature on the heterogeneity in investment response to monetary policy. This literature documents that investment responds to monetary policy more in financially constrained firms, across a variety of proxies of financial constraints: firm size (Kashyap et al, 1994;Gertler and Gilchrist, 1994;Kashyap and Stein, 1995), age (Cloyne et al, 2018), cash and leverage (Jeenas, 2018b), and distance to default (Ottonello and Winberry, 2018). We contribute to this literature by documenting a novel source of heterogeneity in investment response, namely that between tangible and intangible investment, controlling for all traditional proxies of firm financial constraints.…”

“…One approach uses firm characteristics that correlate with financial constraints. Such characteristics include low firm age, as younger firms have less well established access to financial markets (Hadlock and Pierce, 2010;Cloyne et al, 2018), or high cash holdings that indicate precautionary liquidity hoarding (Jeenas, 2018a). Another approach identifies financial constraints from the textual analysis of firm financial statements, by assessing the frequency of language that indicates investment delays due to a lack of financing capacity, such as the delaycon measure of Hoberg and Maksimovic (2015).…”

The Impact of Monetary Policy Shocks on Corporate Dynamic Investment Activity With Financial Heterogeneity

“…Crouzet and Mehrotra (2017) have shown that small firms' higher volatility over the business cycle does not explain financial factors such as leverage and liquid asset holdings, making firm size a weak proxy for financial frictions. Cloyne et al (2018) assess financial frictions' role using microdata on firms' demographics and balance sheet positions in the monetary transmission by looking at the response of capital expenditure to monetary policy surprises. They find that age is another predictor of capital expenditure responses besides leverage and size.…”