Monetary policy uncertainty and corporate financial policies: evidence from U.S. public firms

Abstract

This study examines how monetary policy uncertainty (MPU) affects corporate cash holdings, short-term credit financing, and dividend payout ratios using a quarterly panel of S&P 500 firms from 2008 to 2023. Four MPU measures are employed — market-based, news-based, orthogonalized monetary policy surprises, and FOMC Dissent estimated via firm fixed-effects panel regressions with firm-clustered standard errors and firm-size heterogeneity tests. Contrary to the precautionary savings prediction, higher MPU is associated with lower cash holdings, consistent with a cash depletion mechanism whereby firms draw on internal liquidity rather than building reserves. For credit financing, continuous MPU measures produce negative or insignificant effects, while FOMC Dissent generates a positive and significant response, reflecting pre-emptive borrowing before anticipated rate increases. Dividend payout ratios increase significantly under three of four measures, consistent with the agency motive that firms distribute more cash to reduce managerial discretion under uncertainty. Heterogeneity analysis shows that cash depletion is uniform across firm sizes, the negative credit effect concentrates among large, capital-market-exposed firms, and dividend responses vary by firm size and the nature of the MPU signal.