The Bond Lending Channel of Monetary Policy

An increasing share of firms' borrowing occurs through bond markets. How does debt structure affect the transmission of monetary policy? We present a high-frequency framework that combines identified monetary shocks with a cross-sectional firm-level stock price reaction. An envelope argument shows that, since firms maximize equity value subject to constraints, stock price reactions reflect how monetary policy affects constraints. We find that, contrary to standard bank lending channel predictions, bond financing does not attenuate monetary transmission in the Eurozone: firms with more bonds are more affected by surprise monetary tightenings relative to other firms. This is consistent with significant bond-specific frictions that limit the benefits of disintermediation