The Impact of Monetary Policy Shocks on Corporate Dynamic Investment Activity With Financial Heterogeneity

Abstract

This article assesses the differential reactions of firms’ investment to monetary policy shocks based on various financial heterogeneity measures, such as leverage and cash holdings. It applies U.S. public firms’ panel data from the sample period 1990Q1 to 2007Q4 and high-frequency event-study approach. Low-leverage and high cash holding firms react more to monetary policy shocks explaining the different investment activities. For the high-leverage and low cash holding firms, the two monetary policy shock variable interactions are statistically insignificant. However, they are statistically significant for the low-leverage and high cash holding firms. During a contractionary monetary policy period, higher cash holding firms improve investment efficiency. This article strengthens the literature of corporate investment behavior which can assist advance and optimize macrocontrol policies.