Mehdi Beyhaghi, Federal Reserve Board of Governors
Murray Frank, University of Minnesota
Ping Mclemore, Federal Reserve Bank of Richmond
Ali Sanati, American University
Abstract: We study the effects of monetary policy shocks on corporate investment and financing. Using the Federal Reserve FR Y-14Q data, we find a stark difference between the responses of public and private firms to these shocks. Following an unexpected rise in the policy interest rate, private firms decrease their debt, equity, and real assets. Public firms decrease their debt, but raise equity to offset the impact, resulting in no change in their real assets. Thus, the difference in the use of equity leads to diverging real responses to monetary policy shocks. We use a structural model to explain the differences in the policy impacts. The model suggests that the combination of higher equity issuance cost at private firms and greater investment adjustment costs at public firms drives the differences in monetary policy responses.
Discussant: Arun Upadhyay, Florida International University
Abstract: This paper studies the interaction between public- and private-sector investments in a Q-theoretical framework. We develop a model in which the government chooses optimal public-sector investment to maximize social welfare, and firms maximize their private value in anticipation of government investment. To test the predictions of the model, we hand-collect state- and county-level data on government spending, and construct novel empirical measures of regional government Qs, derived from municipal bond prices, and private-sector Qs, based on a decomposition of firm-level Qs. The main findings suggest that government spending varies with fluctuations in financial markets, and that state governments invest more, particularly through direct cash subsidies, when the valuations of local firms decline.
Abstract: We show that a single firm’s financial constraints trigger a series of investment disruptions that propagate through direct and indirect customer-supplier relationships. Quantitatively, propagation effects are responsible for roughly half of the total reduction in investment spending stemming from constraints. Firms with higher input specificity generate larger spillovers and rely more on trade credit. We employ a Network-RDD that accounts for investment spillovers to bolster identification. Our estimates are robust to network measurement error, endogenous selection effects, and various constraint measures. Our results demonstrate that interdependent investments amplify the consequences of capital market frictions in production networks.
