Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect

Refet Gürkaynak, Hati̇ce Gökçe Karasoy‐can and Sang Seok Lee
Authors registered in the RePEc Author Service: Hatice Gokce Karasoy Can

Journal of Finance, 2022, vol. 77, issue 4, 2375-2421

Abstract: We show that firm liability structure and associated cash flows matter for firm behavior and that financial market participants price stocks accordingly. Stock price reactions to monetary policy announcements depend on the type and maturity of debt issued by the firms and the forward guidance provided by the Fed, both at and away from the zero lower bound. Further, the marginal stock market participant knows the current liability structures of firms and does not rely on rules of thumb. The cash flow exposure at the time of monetary policy actions predicts future investment, assets, and net worth, clearly violating the Modigliani‐Miller theorem.

Date: 2022
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Citations: View citations in EconPapers (15)

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https://doi.org/10.1111/jofi.13163

Related works:
Working Paper: Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect (2019)
Working Paper: Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:77:y:2022:i:4:p:2375-2421

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