Testing of coherence between monetary policy stimulus, financial flexibility and profitability of manufacturing firms

Abstract

Purpose

This paper aims to empirically investigate the evidence of the transmission of monetary policy impulses to firm profitability via manufacturing firms’ short-term and long-term corporate financing decisions.

Design/methodology/approach

This study decomposes the receptiveness of firm profitability to monetary policy shock under circumstances of financial flexibility. Additionally, the study extends its scope to undertake a sector-wise analysis of manufacturing firms from 2008 to 2020. Generalized methods of moments (GMM) and quantile regression models are employed.

Findings

The profitability of firms in the chemical, food and machinery sector are positively impacted by short-term financing, whereas the metal sector is positively impacted. But during the tight monetary policy, short-term financing does not appear to be a significant parameter while explaining the firms’ profitability. Secondly, the profitability of firms in the consumer goods and metal sector is positively impacted by long-term financing. Therefore, debt financing of assets could be more appropriate to maximize profitability in these sectors.

Originality/value

Analyzing the transmission of monetary policy impulses to firm profitability by clustering firms with financial flexibility across six key manufacturing sectors makes the study unique.

Citation

Panda, A.K., Nanda, S. and Hegde, A. (2023), "Testing of coherence between monetary policy stimulus, financial flexibility and profitability of manufacturing firms", International Journal of Managerial Finance, Vol. 19 No. 5, pp. 1024-1052. https://doi.org/10.1108/IJMF-07-2022-0298