Dynamic Adjustment Of Monetary Policy, Region Financial Development And The Efficiency Of Resource Allocation

Based on the dynamic perspective, this paper investigates the impact of the frequency adjustment of monetary policy on firms’financing decisions, investment decisions, and the value relevance of capital investment, considering the role of financial development and aiming to provide more empirical evidence for the adjustment of monetary policy.First, based on firms’financing decsisons, it shows that the frequent adjustment of monetary policy may result in the decreasing of leverage, which results from the decreasing of loans. Also, the impact of frequent adjustment of monetary policy on leverage is more pronounced in regions with higher financial development, because firms in regions with higher financial development could get more loans under the bank-oriented financial system in China and may be more sensitive to the adjustment of monetary policy. Further analysis with the financial constraints and investment opportunites show that the impact monetary policy on firms’financing decisions is mostly driven by the supply sides. As well, it is shown that the frequent adjustment of monetary policy may have a negative effect on the adjustment speed of leverage and reduce the credit term structure.Second, based on firms’ capital expenditures, the frequent adjustment of monetary policy may reduct the capital expenditure because the financing constraints are more serious with the sensitivity of "cash-cash flow" increasing and the substitution between internal and external financing decreasing, especially in regions with lower financial development. Further tests show that the frequent adjustment of monetary policy may induce an aggressive financing decisions in which the capital expenditure dependent on the short-term financing.Third, the frequent adjustment of monetary policy may reduce the value relevance of capital expenditure, especially in regions with high inform financial development and non-state-owned companies, which implies that the frequent adjustment of monetary policy may have a negative effect on the efficiency of resource allocation. Further evidence shows that the negative micro-consequences of frequent adjustment of monetary policy is maily resulted from the increasing of financing costs.Finally, evidence shows that the accounting information quality will be increased in response to the frequent adjustment of monetary policy because high accounting information quality plays an important role in mitigating the negative effect of the frequent adjustment of monetary policy on firms’ financing and investment decisions.The above studies show that the frequent adjustment of monetary policy has a negative effect on firms’ operations and the efficiency of resource allocation, which could induce the risks of real economy and impede the sustainable development of economy. Meanwhile, the above studies provide more detailed evidences for the micro-consequences of the frequent adjustment of monetary policy in China based on the dynamic perspective, which implies that the frequent adjustment of monetary policy may be one of the reasons that induce the economic problems in the post financial crisis period, such as "excess production capacity", "escape" phenomenons. As well, this paper shows that it is important to boost the market-oriented reforms and increasing the information disclosure quality that could make great contributions to the efficiency of resource allocation.