Financial Frictions and the Stock Price Reaction to Monetary Policy

I show that the stock prices of firms subject to greater information frictions have a weaker reaction to monetary policy. The claim is robust to a broad set of proxies for financial constraints and information frictions. Moreover, I use the Enron accounting scandal and Arthur Andersen’s demise as a...

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Bibliographic Details
Published in:The Review of financial studies 2018-10, Vol.31 (10), p.3895-3936
Main Author: Ozdagli, Ali K.
Format: Article
Language:English
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Summary:I show that the stock prices of firms subject to greater information frictions have a weaker reaction to monetary policy. The claim is robust to a broad set of proxies for financial constraints and information frictions. Moreover, I use the Enron accounting scandal and Arthur Andersen’s demise as a large exogenous shock, temporarily raising other Andersen clients’information frictions and, thereby, their financial constraints. The scandal’s disclosure lowered Andersen’s clients’stock price sensitivity to monetary policy to about half that of other firms.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhx106