Impact of Monetary Policy and Firm Characteristics on Short-Term Financial Management Measures: Evidence from U.S. Industrial Firms (original) (raw)

Journal of Financial Management and analysis, 2013

Abstract

In this study, U.S. manufacturing firms’ short-term financial management measures including net working capital, inventory turnover and receivables turnover are examined over the 1971-2005 period. The impacts of firm size, profitability, tangibility, market-to-book ratio, leverage, as well as Federal Reserve monetary policy on short-term financial management measures are analyzed from an “insulation hypothesis” viewpoint. Our findings suggest that U.S. manufacturing firms in their short-term financial management behavior insulate themselves from the effects of monetary policy, and that firm size, profitability, tangibility, market-to-book ratio and leverage all have a significant role in the insulation effect. We find that contractionary monetary policy by itself does not affect firms’ net working capital, but the joint interaction effect of contractionary policy and higher firm leverage has a significant effect on the net working capital of firms.We also find that while contractionary policy significantly affects these firms’ inventory turnover, receivables turnover and asset turnover ratios, its impact on high leverage and low leverage firms are in opposite directions.

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