Accounting quality and the transmission of monetary policy

We examine how firms' accounting quality affects their reaction to monetary policy. The balance sheet channel of monetary policy predicts that the quality of firms' accounting reports plays a role in transmitting monetary policy by affecting information asymmetries between firms and capita...

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Published in:Journal of accounting & economics 2019-11, Vol.68 (2-3), p.101265, Article 101265
Main Authors: Armstrong, Christopher S., Glaeser, Stephen, Kepler, John D.
Format: Article
Language:English
Subjects:
Accounting quality
Balance sheet channel
Financial intermediation
Financial reporting
Information asymmetry
Monetary policy
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description We examine how firms' accounting quality affects their reaction to monetary policy. The balance sheet channel of monetary policy predicts that the quality of firms' accounting reports plays a role in transmitting monetary policy by affecting information asymmetries between firms and capital providers. Consistent with this prediction, we find that accounting quality moderates firms' equity market response and future investment sensitivity to unexpected changes in monetary policy. Moreover, the former relation is amplified for firms with more growth opportunities and more financial constraints, further consistent with accounting quality moderating the transmission of monetary policy. •Accounting quality moderates firms' reaction to unexpected monetary policy surpises.•Mechanism tests suggest that this moderation arises because accounting quality affects information asymmetries between firms and capital providers and therefore the propagation of monetary policy, consistent with the predictions of the balance sheet channel of monetary policy.
doi_str_mv 10.1016/j.jacceco.2019.101265
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subjects Accounting quality
Balance sheet channel
Financial intermediation
Financial reporting
Information asymmetry
Monetary policy
title Accounting quality and the transmission of monetary policy
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