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Accounting Quality and the Transmission of Monetary Policy

56 Pages Posted: 16 Mar 2017  

Chris Armstrong

University of Pennsylvania - Accounting Department

Stephen Glaeser

University of Pennsylvania - Accounting Department

John D. Kepler

University of Pennsylvania - Accounting Department

Date Written: March 14, 2017

Abstract

Information asymmetry between firms and lenders is a key feature of the balance sheet channel of monetary policy transmission, which emphasizes how this friction can impede firms’ access to credit. We argue that the quality of firms accounting reports can play an important role in transmitting monetary policy by affecting information asymmetry with capital providers. Consistent with this prediction, we find that firms with lower accounting quality are more sensitive to monetary policy surprises. The effect of firms’ accounting quality on their equity market response to unexpected changes in monetary policy is more pronounced for firms with more growth opportunities, firms that are more financially constrained, firms with less tangible assets, and firms without a lending relationship, all of which are consistent with the balance sheet channel of monetary transmission. We conclude that firms’ accounting quality is an important determinant of the heterogeneity in their individual responses to 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 and Glaeser, Stephen and Kepler, John D., Accounting Quality and the Transmission of Monetary Policy (March 14, 2017). 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 Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

John D. Kepler

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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