Monetary Policy and Firm Heterogeneity: The Role of Leverage Since the Financial Crisis

Abstract

The role of leverage in explaining firm-level responses to monetary policy changed around the financial crisis of 2007-09. The stock price of firms with high leverage was less responsive to monetary policy shocks in the pre-crisis period but has become more responsive since the crisis. We document supporting evidence of this result from firm-level option prices and investment data. We find some suggestive evidence that the higher responsiveness is driven by firms whose leverage is more dependent on long-term debt, pointing to an outsize role for monetary policy affecting long-term funding conditions since the crisis.

Keywords: monetary policy transmission, leverage, firm heterogeneity

JEL Classification: E52, E44, E43, E22