The Heterogeneity of Stock Prices Responses to Policy Shocks: Evidence From International Data

Abstract

In the aftermath of a shock in an economy, stock prices tend to be subject to adjustments. We observe heterogeneous responses to shocks to nominal interest policy rates across firms differing by the degree of financial leverage and by the expanse of financing frictions that managers encounter when accessing external finance. We find that a unit shock to nominal interest rates decreases stock prices of firms with high debt to asset ratios whereas it increases stock prices of firms with low debt to asset ratios. We provide puzzling evidence that stock prices are positively related to nominal interest policy rates in case of low and zero leverage firms. This fact represents an anomaly which we purport to explain.