Accounting Quality and the Transmission of Monetary Policy

Abstract

Information asymmetry between firms and lenders is a key feature of the balance sheet channel of monetary policy transmission, which emphasizes how this friction can impede firms’ access to credit. We argue that the quality of firms accounting reports can play an important role in transmitting monetary policy by affecting information asymmetry with capital providers. Consistent with this prediction, we find that firms with lower accounting quality are more sensitive to monetary policy surprises. The effect of firms’ accounting quality on their equity market response to unexpected changes in monetary policy is more pronounced for firms with more growth opportunities, firms that are more financially constrained, firms with less tangible assets, and firms without a lending relationship, all of which are consistent with the balance sheet channel of monetary transmission. We conclude that firms’ accounting quality is an important determinant of the heterogeneity in their individual responses to monetary policy.