Financial Constraints, Monetary Policy Shocks, and the Cross-Section of Equity Returns
57 Pages Posted: 6 Nov 2015 Last revised: 9 Nov 2015
Date Written: August 10, 2015
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 firms.
Keywords: Financial Constraint, Monetary Policy, Cross-Section of Stock Returns
JEL Classification: E52, G12, G14, G30
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