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Working Paper
The Fed Information Effect and Firm-Level Investment: Evidence and Theory
Hsu, Alex; Mitra, Indrajit; Xu, Yu; Zeng, Linghang (2023-06-20)
We present evidence that the Fed's private information about economic conditions revealed through Federal Open Market Committee announcements affect firm investment. We use firm-level investment data and analyst forecasts of firm fundamentals to document three facts. First, the investment rate sensitivity to Fed information is greater for more cyclical firms. Second, revisions in analyst forecasts of firm fundamentals are greater for more cyclical firms. Third, the investment response is consistent with changes in firm profitability following Fed announcements. We propose a HANK model to ...
FRB Atlanta Working Paper , Paper 2023-6a

Working Paper
Equity Financing Risk
Medhat, Mamdouh; Palazzo, Berardino (2020-05-20)
A risk factor linked to aggregate equity issuance conditions explains the empirical performance of investment factors based on the asset growth anomaly of Cooper, Gulen, and Schill (2008). This new risk factor, dubbed equity ﬁnancing risk (EFR) factor, subsumes investment factors in leading linear factor models. Most importantly, when substituted for investment factors, the EFR factor improves the overall pricing performance of linear factor models, delivering a signiﬁcant reduction in absolute pricing errors and their associated t-statistics for several anomalies, including the ones ...
Finance and Economics Discussion Series , Paper 2020-037

Discussion Paper
Assisting Firms during a Crisis: Benefits and Costs
Wall, Larry D. (2020-08-10)
Public and private efforts to reduce COVID-19 infection levels have led to a sharp drop in economic activity around the world. In an attempt to mitigate the damage to businesses, governments around the world have implemented a variety of financial programs to help firms. These programs have been criticized as interfering with markets, providing bailouts, and creating adverse incentives. In this article, I review both the rationale for government-provided assistance and the costs of providing that assistance from the perspective of how that aid effects the likely level and volatility of ...
Policy Hub , Paper 2020-10

Working Paper
The Profitability Channel of Monetary Policy Transmission
Mitra, Indrajit; Hsu, Alex; Zeng, Linghang (2023-06-20)
We provide firm-level evidence that Federal Open Market Committee announcements have real effects by changing expectations of firm profitability. We use an existing decomposition of a monetary policy shock into a central bank information component (CBI) and a conventional monetary component (MP). We find (1) firms with a higher value of capital asset pricing model (CAPM) beta have a higher investment rate sensitivity to the CBI component; no similar heterogeneity in investment response is observed for the MP component. We also find (2) the heterogeneity in investment sensitivity is due to ...
FRB Atlanta Working Paper , Paper 2023-6

Working Paper
Relationship Lending: That Ship Has Not Sailed for Community Banks
Holod, Dmytro; Peek, Joe; Torna, Gökhan (2024-04-01)
This study provides direct evidence of the value to banks arising from relationship lending by estimating the market premium placed on banking organizations’ small business loan portfolios. Using data from the small business loan survey contained in the June bank Call Reports, we find that small commercial and industrial (C&I) loans add value to community banks both in absolute terms and relative to the value contributed by larger C&I loans. The value‐enhancing effect of small business loans is observed primarily at small community banks, and it was present during the Great Recession as ...
Working Papers , Paper 24-5

Working Paper
What Drives Inventory Accumulation? News on Rates of Return and Marginal Costs
Gunn, Christopher; Gortz, Christoph; Lubik, Thomas A. (2019-10-10)
We study the effects of news shocks on inventory accumulation in a structural VAR framework. We establish that inventories react strongly and positively to news about future increases in total factor productivity. Theory suggests that the transmission channel of news shocks to inventories works through movements in marginal costs, through movements in sales, or through interest rates. We provide evidence that changes in external and internal rates of return are central to the transmission for such news shocks. We do not find evidence of a strong substitution effect that shifts production from ...
Working Paper , Paper 19-18

Working Paper
A Spanner in the Works: Restricting Labor Mobility and the Inevitable Capital-Labor Substitution
Kannan, Bharadwaj; Pinheiro, Roberto; Turtle, Harry (2022-11-08)
We model an environment with overlapping generations of labor to show that policies restricting labor mobility increase a firm's monopsony power and labor turnover costs. Subsequently, firms increase capital expenditure, altering their optimal capital-labor ratio. We confirm this by exploiting the statewide adoption of the inevitable disclosure doctrine (IDD), a law intended to protect trade secrets by restricting labor mobility. Following an IDD adoption, local firms increase capital expenditure (capital-labor ratio) by 3.5 percent (5.5 percent). This result is magnified for firms with ...
Working Papers , Paper 22-30

Working Paper
The Profitability Channel of Monetary Policy Transmission
Hsu, Alex; Mitra, Indrajit; Zeng, Linghang (2023-06-20)
We provide firm-level evidence that Federal Open Market Committee announcements have real effects by changing expectations of firm profitability. We use an existing decomposition of a monetary policy shock into a central bank information component (CBI) and a conventional monetary component (MP). We find (1) firms with a higher value of capital asset pricing model (CAPM) beta have a higher investment rate sensitivity to the CBI component; no similar heterogeneity in investment response is observed for the MP component. We also find (2) the heterogeneity in investment sensitivity is due to ...
FRB Atlanta Working Paper , Paper 2023-06

Working Paper
The Fed Information Effect and Firm-Level Investment: Evidence and Theory
Hsu, Alex; Mitra, Indrajit; Xu, Yu; Zeng, Linghang (2024-03)
We present evidence that the Fed's private information about economic conditions revealed through Federal Open Market Committee announcements affect firm investment. We use firm-level investment data and analyst forecasts of firm fundamentals to document three facts. First, the investment rate sensitivity to Fed information is greater for more cyclical firms. Second, revisions in analyst forecasts of firm fundamentals are greater for more cyclical firms. Third, the investment response is consistent with changes in firm profitability following Fed announcements. We propose a HANK model to ...
FRB Atlanta Working Paper , Paper 2023-6a

Working Paper
Are Euro-Area Corporate Bond Markets Irrelevant? The Effect of Bond Market Access on Investment
von Beschwitz, Bastian; Howells, Conor T. (2016-06-30)
We compare how bond market access affects firms? investment decisions in the United States and the euro area. Having a bond rating enables US corporations to invest more and undertake more acquisitions. In contrast, in the euro area, bond ratings have no effect on investment decisions. Similarly, firms with bond ratings have higher leverage in the United States, but not in the euro area. This difference may be due to euro-area firms getting sufficient financing from banks. Consistent with this explanation, euro-area bond ratings became more relevant for investment after the banking crisis of ...
International Finance Discussion Papers , Paper 1176

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