Corporate Credit and Monetary Policy: The Impact of Firm-Specific Characteristics on Financial Structure

This paper examines the impact of monetary policy on UK firms' access to bank and market finance when allowance is made for differences in firm-specific characteristics. A theoretical model determines the cut-off values for project profitability that would allow firms to access bank or market finance. This model predicts that specific characteristics in terms of size, age, risk and debt can make a firm more vulnerable to tightening credit when interest rates increase. Empirically, the paper shows, using a panel of 16,000 UK firm records over 10 years, that firms distributed according to their type (asset size, rating etc) do have differing access to bank lending and market finance. Small, young and risky firms are more significantly affected by tight monetary conditions than large, old and secure firms. The evidence is consistent with a credit channel, and demonstrates that there are distribution implications from tightening monetary policy.