The Bond Lending Channel of Monetary Policy

Given that an increasing share of firms' borrowing occurs through bond markets, we study how debt structure affect the transmission of monetary policy. We present a high-frequency framework that combines identified monetary shocks with cross-sectional firm-level stock price reaction. An envelope argument shows that firm-level stock market data is particularly informative: since firms maximize equity value subject to constraints, stock price reactions directly reflect how monetary policy affects constraints in the population of firms once we control for equity duration. We apply this idea to a sample of US and Eurozone public firms in 2001-07. In Europe, contrary to classical bank lending channel predictions, firms with more bank debt are less affected by surprise monetary tightening relative to other firms. On the other hand, we find no differential effect in the United States. We stress the role of firm liquidity management and difference in financial systems to explain these findings