The effect of a change in monetary policy on efficiency and performance of corporate investment: Evidence from EM Asia
Post by MSF Chula at Sunday, 10 January 2021 05:55 PM

Due to the number of studies relating to the effect of monetary policy on banks risk taking and their profitability, this study try to find the associations between each types of monetary policy which uses a net change in policy rate to indicate each types of monetary policy – negative net change means expansionary monetary policy and positive net change means contractionary monetary policy, and (1) firm’s risk-taking behavior measured by the standard deviation between firm and country-average of return-on-asset ratio, (2) investment-growth sensitivity using Tobin’s Q and (3) future performance measured by return-on-asset ratio by focusing on non-financial sector. Other than that, firm characteristics like dividend policy, government ownership and international ownership are included to see how they associate to firm’s risk-taking and investment behavior during both type of monetary policy.

By focusing on 5 countries in emerging market Asia including Indonesia, Malaysia, Philippines, Singapore and South Korea over the period starting from the Q2 2002 to Q2 2018 which include pre-, during and post- U.S. subprime financial crisis by excluding financial sectors, the findings show the inconsistency of the association between monetary policy across time since we can see that firms tend to take more risk and their investment will sensitive more to growth opportunity when expansion policy is proposed during pre-crisis period while the expansion monetary policy has a positive association to firm’s future performance for the post-crisis period. Other than that, the results from firm characteristic analysis show that, during expansion period, dividend-paying firms tend to avoid risk while international firms tend to take more risk. In sum, we cannot conclude the clear association between monetary policy and the behavior or the performance of non-financial firms across time.

Last updated at Sunday, 10 January 2021 05:55 PM