Financial frictions and the reaction of stock prices to monetary policy shocks

Ali Ozdagli

No 14-6, Working Papers from Federal Reserve Bank of Boston

Abstract: This paper reveals and tests a new theoretical implication of the credit channel of monetary policy: as financial frictions (monitoring or auditing costs) increase, the reaction of stock prices to monetary policy shocks decreases. Correspondingly, towards the end of the Enron accounting scandal, the stock prices of firms sharing the same auditor as Enron responded by about 50 to 60 basis points less than other firms to a 10 basis point reduction in the federal funds target rate. This effect is particularly strong among more opaque firms for which financial statements likely provide a more important monitoring tool.

Keywords: financial constraints; stock market; credit channel; monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E52 G12 G32 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2014-07-29
New Economics Papers: this item is included in nep-acc, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Working Paper: Financial Frictions and Reaction of Stock Prices to Monetary Policy Shocks (2014)
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