Throwing the Kitchen Sink: Assessing the Impact of the Federal Reserve’s Monetary Policy on US Firms’ Performance during the Covid-19 Pandemic
Otero Nule, Miguel Eduardo
The COVID19 Pandemic has led to liquidity constraints in households and firms. To maintain the proper functioning of financial markets, the Federal Reserve has responded by increasing its asset purchases by buying U.S. treasury bonds, mortgage-backed securities and creating a dozen credit lending facilities. Compared to the Great Recession, the FED has increased its intervention through the corporate bond market via the Primary and Secondary Market Corporate Bond Facilities. These facilities were designed to provide additional liquidity to firms whose bonds were rated as investment-grade as of March 22, 2020. Recent literature has shown that asset purchases and the corporate credit facilities' announcement reduced the credit risk of eligible corporations, lowering borrowing costs and providing additional liquidity. However, there has been little evidence of the impact of the additional liquidity provided by the FED on corporate behavior. This thesis exploits the variation among investment grade and non-investment grade firms as the primary identification strategy. It uses differences-in-differences estimators on full and matched samples to assess the FED policy's impact on U.S. non-financial firms. The findings suggest that eligible corporations increased investment, reduced cash holdings, and increased long-term debt issuance after the FED’s monetary policy toolkit announced on March 2020 vis-à-vis non-eligible corporations. Additional evidence suggests that employment increased on treated firms compared to non-treated firms, but results are not statistically significant. The findings on investment and cash are robust to different model specifications and alternative measurements of outcomes. This thesis contributes to the empirical evidence of the bond-lending channel and the relevance of corporate bond market interventions for macroeconomic stabilization.
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