Accounting Quality and the Transmission of Monetary Policy

73 Pages Posted: 16 Mar 2017 Last revised: 29 Sep 2019

See all articles by Chris Armstrong

Chris Armstrong

University of Pennsylvania - Accounting Department

Stephen Glaeser

University of North Carolina (UNC) at Chapel Hill - Accounting Area

John D. Kepler

Stanford Graduate School of Business

Date Written: August 24, 2019

Abstract

We examine how firms’ accounting quality affects their reaction to monetary policy. The balance sheet channel of monetary policy predicts that the quality of firms’ accounting reports plays a role in transmitting monetary policy by affecting information asymmetries between firms and capital providers. Consistent with this prediction, we find that accounting quality moderates firms’ equity market response and future investment sensitivity to unexpected changes in monetary policy. Moreover, the former relation is amplified for firms with more growth opportunities and more financial constraints, further consistent with accounting quality moderating the transmission of monetary policy.

Keywords: monetary policy, federal funds rate, balance sheet channel, accounting quality, financial reporting, information asymmetry, agency conflicts, event study, financial intermediation

JEL Classification: E44, E51, E52, G30, G32, M41

Suggested Citation

Armstrong, Chris S. and Glaeser, Stephen and Kepler, John, Accounting Quality and the Transmission of Monetary Policy (August 24, 2019). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2933093 or http://dx.doi.org/10.2139/ssrn.2933093

Chris S. Armstrong (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Stephen Glaeser

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599
United States

John Kepler

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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