An Empirical Study of Monetary Policy Transmission Through Floating Rate Corporate Debt

Abstract: Considering the contemporary shift in the interest rate regime and the high levels of corporate debt in the US market, we show that monetary policy surprises have an impact on stock returns. This impact is dominated by a surprise in Fed forward guidance. By examining the liability structure of S&P 500 firms from 2005 to 2022, our results demonstrate the effectiveness of the cash flow channel. These balance sheet effects reveal that investors perceive that cash flows of firms with floating rate debt decline more in tightening policy surprises than firms with fixed rate debt, thereby, negatively affecting stock returns. Hence, cash flows. However, extending a methodology due Gürkaynak, Karasoy-Can, and Lee (2022), debt maturity fails to enhance the resolution of the cash flow channel. Similarly, we fail to observe the effectiveness of hedging in moderating the negative impact of the cash flow channel on stock returns.