Monetary Policy, Corporate Finance and Investment

78 Pages Posted: 29 Mar 2019 Last revised: 17 Jul 2019

See all articles by James Cloyne

James Cloyne

University of California, Davis; Bank of England - Monetary Analysis

Clodomiro Ferreira

Banco de España

Maren Froemel

London Business School

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2019

Abstract

We provide new evidence on how monetary policy affects investment and firm finance in the United States and the United Kingdom. Younger firms paying no dividends exhibit the largest and most significant change in capital expenditure – even after conditioning on size, asset growth, Tobin’s Q, leverage or liquidity – and drive the response of aggregate investment. Older companies, in contrast, hardly react at all. After a monetary policy tightening, net worth falls considerably for all firms but borrowing declines only for younger non-dividend payers, as their external finance is mostly exposed to asset value fluctuations. Conversely, cash-flows change less markedly and more homogeneously across groups. Our findings highlight the role of firm finance and financial frictions in amplifying the effects of monetary policy on investment.

Keywords: monetary policy, financial frictions, firm finance, investment

JEL Classification: E22, E32, E52

Suggested Citation

Cloyne, James and Ferreira, Clodomiro and Froemel, Maren and Surico, Paolo, Monetary Policy, Corporate Finance and Investment (March 28, 2019). Banco de Espana Working Paper No. 1911. Available at SSRN: https://ssrn.com/abstract=3361718 or http://dx.doi.org/10.2139/ssrn.3361718

James Cloyne (Contact Author)

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Clodomiro Ferreira

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Maren Froemel

London Business School

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Paolo Surico

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

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