Download This PaperFinancial Constraints, Monetary Policy Shocks, and the Cross-Section of Equity Returns
56 Pages Posted: 23 Feb 2015 Last revised: 1 Oct 2015
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Financial Constraints, Monetary Policy Shocks, and the Cross-Section of Equity Returns
Financial Constraints, Monetary Policy Shocks, and the Cross-Section of Equity Returns
Date Written: August 10, 2015
Abstract
We analyze the impact of unanticipated monetary policy changes on equity returns and document that financially constrained firms earn a significantly lower return following rate increases as compared to unconstrained firms. Trading volume is significantly lower for constrained firms on FOMC announcement days but the differential return response manifests with a delay. Further, unanticipated increases in Federal funds rate are associated with a larger decrease in expected cash flow news, but not of discount rate news, for constrained firms relative to unconstrained firms. Our results highlight how monetary policy shocks have a disproportionate real impact on financially constrained firms.
Keywords: Financial Constraint, Monetary Policy, Cash Flow News
JEL Classification: G10, E50
Suggested Citation: Suggested Citation
Sudheer Chava (Contact Author)
Georgia Institute of Technology - Scheller College of Business ( email )
800 West Peachtree St.
Atlanta, GA 30308
United States
HOME PAGE: http://https://fintech.gatech.edu
