Abstract
We analyze the impact ofa unanticipated monetary policy changes on the cross-section of U.S. equity returns. Financially constrained firms earn a significantly lower (higher) return following surprise interest rate increases (decreases) as compared to unconstrained firms. This differential return response between constrained and unconstrained firms appears after a delay of 3 to 4 days. Further, unanticipated Federal funds rate increases are associated with a larger decrease in expected cash flow news, but not discount rate news, for constrained firms relative to unconstrained firms.
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Financial Constraints and the Response of Business Investment to Monetary Policy Shocks