Corporate disclosure in response to changes in monetary policy

Abstract

This paper examines how changes in monetary policy affect corporate disclosure. I focus on the changes in the U.S. federal funds rate because while these changes affect a broad spectrum of firms via their effects on the cost and supply of capital, they are relatively exogenous to individual firms' circumstances. A rise in the federal funds rate may incentivize firms to increase disclosure to counteract the shock of the increased cost of capital. Alternatively, firms may decrease disclosure in expectation of declines in investment spending and external financing needs. By examining the earnings guidance of publicly listed firms from 1995 to 2009, I find that a rise in the federal funds rate induces more corporate disclosure. The cross-sectional tests show that the monetary policy effect is stronger when the monetary policy is more persistent or when firms have more growth opportunities, but is weaker for more financially constrained firms. The effect also exists for both contractionary and expansionary monetary policy and is stronger for the latter. Finally, I find that firms decrease their disclosure level in response to the announcements of unconventional expansionary monetary policy during 2008 and 2015. Overall, my paper provides new insight into how firms respond to macroeconomic policy changes in terms of disclosure.