Abstract
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.
Highlights
In VAR studies, monetary policy appears to have large and long-lasting eects on real activity
We further show that, when measured this way, stock market reactions to monetary policy surprises as a function of cash ow exposure of rms have not changed during the Zero Lower Bound (ZLB) period: forward guidance has been as eective during the ZLB as it had been before it
We show that oating rate exposure should be measured taking into account the maturity of liabilities, leverage; that the relevant measure of monetary policy is the guidance about future interest rates, which drive future oating rate payments; and that when exposure and policy surprises are measured as described, one sees the dierential eect of monetary policy surprises on stock prices of rms with dierent cash ow exposures and that this has
Summary
In VAR studies, monetary policy appears to have large and long-lasting eects on real activity. There is a transfer in the net present value sense in the opposite direction for rms with xed rate liabilities Whether this eect is priced in at high frequency, in response to monetary policy surprises, is an interesting question. Our rst test is whether rms that have more cash ow exposure due to having issued more and longer maturity oating rate debt see their stock prices respond more to monetary policy surprises regarding forward guidance in high frequency.
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