Research On The Impact Mechanism Of Monetary Policy On Corporate Investment Behavior

The effect of the monetary policy of the Central Bank to micro enterprises is realized through the transmission mechanism of monetary policy. That is, after the central bank using monetary policy tools, it affects the real economy decision by influencing the intermediate target, and ultimately achieve the desired policy objectives. In China, the main driving force of economic growth is Investment, that make researching the influence of monetary policy on investment has important significance for the study of enterprise behavior and evaluation of policy effect. In the field of economics, according to the traditional theory of Keynes theory, the monetary policy transmission channels operate directly through the role of interest rates. The interest rate is the key factor that makes the demand of capital(investment) and the capital supply(savings) tends to balance(Keynes, 1936). The sensitivity and long-term elasticity of companies’ investment to their user cost of capital is the main measure of the interest rate channel. At the same time, the enterprise investment behavior is an important part of the field of corporate finance, according to the relevant theory of investment, business investment depends not only on the investment opportunities in the imperfect market conditions, adverse selection and moral hazard caused by asymmetric information significantly affects the enterprises investment behavior, which may make the monetary policy impact on the enterprise become more complex, that is to say, in addition to the traditional monetary policy interest rate channel, there may be other influencing channels for transmission mechanism of monetary policy.The past research on the influence of monetary policy on economic indicators are mostly based on the macro level but less from the micro level. Researches based on these two levels(micro level and macro level) are obviously fragmented. Due to some inherent drawbacks of macro level data set, the monetary policy effect mechanism at micro-level has not yet have a clear understanding. Therefore the study of this problem has important theoretical value and practical significance.This paper studies the influence mechanism of monetary policy on investment behavior and effect consequence. Based on the theory of monetary policy transmission mechanism, financing constraints theory, the theory of debt governance mechanism, this paper analyzed the mechanism of action of monetary policy on corporate investment, constructing a monetary policy transmission mechanism framework which consists of three channels: the cost of capital effect, the liquidity effect, and the debt governance channel. Then, this paper examines the three channels. In the empirical part, this paper tests the sensitivity of the investment of enterprises to their costs of capital at the micro level using new classical investment theory framework and error correction model of dynamic panel data. The purpose of this procedure is to identify the existence and the degree of influence of interest rate transmission of monetary policy. Secondly, during the investigation of the effectiveness of monetary policy transmission mechanism, this paper tests the differential response of enterprise investment to the interest rate transmission mechanism of monetary policy according to companies’ different financial characteristics. And combines with China’s property rights system as well as the marketization process in the transition period. The consideration of these two system background is to examine whether and how the institutional environment will affect the result of interest rate transmission of monetary policy.This is helpful for understanding the reasons of the differences in the transmission mechanism of monetary policy at enterprise level and system level, and thus make our analysis more in-depth. Thirdly, after the testing of the function of monetary policy’s cost of capital effect(that is, the interest rate channel), this paper builds two types of investment efficiency models, one is the flexibility of investment decision and the other is inefficient investment model which consists of overinvestment and underinvestment, and examines the impact of monetary policy on the enterprise investment efficiency using panel data.The main results of this paper can be summarized as follows: First, China’s listing corporation’s investment is significantly negatively correlated with their user cost of capital, indicating that the interest rate transmission mechanism of monetary policy on investment is effective overall. That is, the cost of capital is one of the channels of monetary policy which affect the enterprise investment. Second, there is heterogeneity in the effect of monetary policy on companies’ investment, depending on companies’ investment opportunities and financing constraints characteristics. The results show that, the interest rate transmission channel of monetary policy has no significant effect on companies which have less investment opportunities and while a significant effect on companies which have more investment opportunities. There is a huge impact on companies which are facing financing constraints but no effect on companies which are less financing constraints. Third, in the aspect of institutional environment, In terms of ownership system, the state-owned companies’ investment is not sensitive to interest transmission channel, while non-state enterprises’ investment is sensitive to it. In terms of marketization, investment of companies which are in the areas with higher degree of marketization is more sensitive to their capital cost compared with areas with lower degree of marketization. Fourth, system characteristics and companies’ financial characteristics will interact and thus have mutual influence of monetary policy on the investment of enterprises. Specifically, state-owned property right can weaken and even distort the interest rate transmission mechanism by changing the decisive role of investment opportunities in firms’ investment decision making. While marketization can optimize the transmission mechanism of monetary policy by relieving the over-reaction of companies which are facing financing constraints and improving the using cost of capital sensitivity of companies which are less financing constraints. Fifth, In order to explore the resource allocation function of monetary policy, this paper examines the impact of monetary policy on investment efficiency. The results show that, constrictive monetary policy can enhance the inhibitory effect of debt on overinvestment, that means constrictive monetary policy has a governance function, which can optimize the allocation of resources. But the impacts of constrictive monetary policy on investment efficiency are different with enterprises’ financial characteristics. This paper also finds that the loose monetary policy can improve the financing ability of enterprises, alleviating the financing constraints of enterprises, helping enterprises to grasp the investment opportunities and thus can improve the efficiency of investment, which means the loose monetary policy can also play a role in optimizing the allocation of resources. The policy implication of above empirical evidences is that in order to make the monetary policy be more effective, the government should consider the heterogeneity of companies at micro level in formulating and implementing monetary policy.This study expands and deepens the research of the effect of monetary policy on enterprises’ behaviors, and provides some clear evidence of the monetary policy transmission mechanism at micro level, which can help studying the transmission mechanism of monetary policy more systematic and can provide a deeper understanding of the heterogeneity impacts of monetary policy. The main innovations of this paper are as follows. First, this paper integrates economics and corporate finance field on the enterprise investment theory system, and clearly analyzes the influence mechanism of monetary policy of enterprise investment behavior, opened up a new way for the research of enterprise investment field. Moreover, the existing research on the investment efficiency is mostly carried out within the scope of corporate governance but less concerned about the impact of macroeconomic policy. This paper brings investment efficiency into the framework of the influence of monetary policy to corporate behavior, greatly makes up for the deficiency of the related studies mainly focus on the investment amount, and helps to find a new perspective for the study of the mechanism of monetary policy on corporate behavior. Second, with the previous research are based on the macro level, this paper Jumps out of the existing solid ideas by exploring the influence mechanism of monetary policy from the micro level, and thus extends the impact chain of macroeconomic policies on the economic. Using the micro data can find the huge differences among observed values, so as to test the heterogeneity of the transmission mechanism of monetary policy. Therefore, using micro data of economic research can not only provide more direct evidence for the effect of monetary policy, but get more reliable conclusions. Third, this paper examines the heterogeneity of the effect of monetary policy from two aspects in empirical research. At the firm level, based on the imperfect capital market reality, this paper examines the different concequences of monetary policy according to two determinants of investment behavior: investment opportunities and the financing constraints. These considerations expand the relevant research, deepening the existing research(Xu and Chen, 2012), and enrich the existing relevant literature about monetary policy conduction mechanism. At the system level, although a lot of literatures have studied the effect of system characteristics on corporate finance or investment, but there are few research about how the system affect the effect of economic policy. Combining with the special system background in China during the transition period, this paper tests the intermediary effect of the institutional factors in the transmission mechanism of monetary policy according to the property right and the process of marketization. These two factors make the research more real, and expand the relative study of Peng(2007), and thus contribute to a more deeper understanding of the heterogeneity of the effect of monetary policy. Finally, in terms of the empirical test method, this paper uses the dynamic error correction panel data model, and estimated the model by system GMM method, because the system GMM method has some advantages in dealing with the endogenous problem in regression parameters, so as to make the estimated results more reliable.