Financial Constraints, Monetary Policy Shocks, and the Cross-Section of Equity Returns

57 Pages Posted: 6 Nov 2015 Last revised: 9 Nov 2015

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Alex Hsu

Georgia Institute of Technology - Scheller College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 10, 2015

Abstract

We analyze the impact of unanticipated monetary policy changes on equity returns and document that financially constrained firms earn a significantly lower return following rate increases as compared to unconstrained firms. Trading volume is significantly lower for constrained firms on FOMC announcement days but the differential return response manifests with a delay. Further, unanticipated increases in Federal funds rate are associated with a larger decrease in expected cash flow news, but not of discount rate news, for constrained firms relative to unconstrained firms. Our results highlight how monetary policy shocks have a disproportionate real impact on financially constrained fi rms.

Keywords: Financial Constraint, Monetary Policy, Cross-Section of Stock Returns

JEL Classification: E52, G12, G14, G30

Suggested Citation

Chava, Sudheer and Hsu, Alex, Financial Constraints, Monetary Policy Shocks, and the Cross-Section of Equity Returns (August 10, 2015). Georgia Tech Scheller College of Business Research Paper No. 1. Available at SSRN: https://ssrn.com/abstract=2687157 or http://dx.doi.org/10.2139/ssrn.2687157

Sudheer Chava (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Alex Hsu

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
4043851123 (Phone)

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