Accounting Quality and the Transmission of Monetary Policy

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