Working Paper: NBER ID: w25366
Authors: James Cloyne; Clodomiro Ferreira; Maren Froemel; Paolo Surico
Abstract: We provide new evidence on how monetary policy affects investment and firm finance in the United States and the United Kingdom. Younger firms paying no dividends exhibit the largest and most significant change in capital expenditure - even after conditioning on size, asset growth, Tobin's Q, leverage or liquidity - and drive the response of aggregate investment. Older companies, in contrast, hardly react at all. After a monetary policy tightening, net worth falls considerably for all firms but borrowing declines only for younger non-dividend payers, as their external finance is mostly exposed to asset value fluctuations. Conversely, cash flows change less markedly and more homogeneously across groups. Our findings highlight the role of firm finance and financial frictions in amplifying the effects of monetary policy on investment.
Keywords: Monetary Policy; Corporate Finance; Investment
JEL Codes: E22; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Firm investment decisions (G31) |
| Younger firms not paying dividends (G35) | Substantial adjustments in capital expenditure (G31) |
| Net worth declines (G19) | Borrowing decreases for younger non-dividend payers (G51) |
| Financial frictions (G19) | Tighter borrowing constraints for younger firms (L26) |
| Age and dividend status (G35) | Predictive power on investment responses (G11) |
| Monetary policy changes (E52) | Minimal reaction in older firms paying dividends (G35) |