Stock market's assessment of monetary policy transmission: the cash flow effect

  • We show that firm liability structure and associated cash flow matter for firm behavior, and that financial market participants price stocks accordingly. Looking at firm level stock price changes around monetary policy announcements, we find that firms that have more cash flow exposure see their stock prices affected more. The stock price reaction depends on the maturity and type of debt issued by the firm, and the forward guidance provided by the Fed. This effect has remained intact during the ZLB period. Importantly, we show that the effect is not a rule of thumb behavior outcome and that the marginal stock market participant actually studies and reacts to the liability structure of firm balance sheets. The cash flow exposure at the time of monetary policy actions predicts future net worth, investment, and assets, verifying the stock pricing decision and also providing evidence of cash flow effects on firms' real behavior. The results hold for S&P500 firms that are usually thought of not being subject to tight financial constraints.

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Author:Refet S. GürkaynakORCiDGND, Hatice Gökçe Karasoy-Can, Sang Seok LeeORCiDGND
URN:urn:nbn:de:hebis:30:3-515107
URL:https://ssrn.com/abstract=3476312
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 628
Series (Serial Number):CFS working paper series (628)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2019
Year of first Publication:2019
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2019/10/28
Tag:Cash flow effect of monetary policy; financial frictions; investor sophistication; stock pricing
Issue:August 30, 2019
Page Number:56
HeBIS-PPN:455257574
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht