Monetary Policy, Corporate Finance and Investment
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.
First Draft: March 2018. We are grateful to Saleem Bahaj, Larry Christiano, Juan-Antolin Diaz, Thomas Drechsel, Martin Eichenbaum, Angus Foulis, Mark Gertler, Sebnem Kalemli-Ozcan, Yueran Ma, Elias Papaioannou, Gabor Pinter, Martin Schneider, Philip Vermeulen, Gianluca Violante and seminar participants at Banque de France, Bank of Spain, Northwestern University, University of Virginia, the Fed Board of Governors, University of Porto, the NBER Summer Institute 2018, CREI/UPF, LBS, the Federal Reserve Bank of San Francisco, the Science Po 2018 workshop on empirical monetary economics and LSE for very useful comments and suggestions. We also thank Diego Kaenzig and Ezgi Kurt for excellent research assistance. The views in this paper are those of the authors and do not necessarily reflect the views of the Bank of Spain, the Euro-system or the Bank of England. Surico gratefully acknowledges financial support from the European Research Council (Consolidator Grant 771976). Address for correspondence: James Cloyne (University of California Davis, NBER and CEPR) firstname.lastname@example.org; Clodomiro Ferreira (Bank of Spain) email@example.com; Maren Froemel (London Business School) firstname.lastname@example.org; Paolo Surico (London Business School, Bank of England and CEPR) email@example.com. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.