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Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect
Author(s) -
GÜRKAYNAK REFET,
KARASOYCAN HATİCE GÖKÇE,
LEE SANG SEOK
Publication year - 2022
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.13163
Subject(s) - cash flow , monetary economics , economics , stock market , debt , monetary policy , business , financial economics , finance , paleontology , horse , biology
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.