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Prof. Oliver Binz
Assistant Professor of Accounting
European School of Management and Technology
ESMT Berlin

We study the dynamic transmission of monetary policy shocks into corporate profitability. We find an initial negative association between monetary policy shocks and corporate revenues and expenses. The revenue response is consistent with a consumer substitution effect, while the expense response is consistent with a firm cost of capital effect. The expense effect exceeds the revenue effect, yielding a positive relation between the shocks and profitability in the short run. Both effects concentrate in cash revenues and expenses and vary predictably with firms’ business models. The expense effect is pronounced for investment outlays that must be expensed rather than capitalized, suggesting that accounting treatment influences firms’ reactions to monetary policy shocks.