Abstract
We study the dynamic transmission of monetary policy shocks into corporate profitability. We find an initial negative association between the shocks and corporate revenues and expenses. The revenue response is consistent with a consumer substitution effect, while the expense response is consistent with a firm cost of capital effect. The expense effect exceeds the revenue effect, yielding a positive relation between the shocks and profitability. Additional tests show that the effect concentrates in cash rather than accrual revenues and expenses and that it varies predictably with firms’ industry membership and the accounting treatment of firms’ investment outlays.
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