The Impact of Monetary Policy Shocks on Stock Price Crash Risk
Abstract
This study examines the impact of monetary policy shocks (MPS) on future stock price crash risk (SPCR), using a sample of US firms from 1995 to 2019. We find that expansionary MPS significantly reduce the likelihood of SPCR, while contractionary MPS show no statistically significant effect on SPCR. These results remain robust after controlling for omitted variable bias, reverse causality concern, selection bias, varying forecasting windows, and incorporating different industry definitions. Furthermore, we find that expansionary MPS prevent the accumulation of bad news by curbing aggressive accrual and real earnings management (REM). We also provide evidence for two non–earnings–management‐based channels, where expansionary shocks alleviate external financing constraints and improve investment efficiency. The relation between expansionary MPS and SPCR is more pronounced among firms with better governance monitoring, lower ex‐ante risk, less information asymmetry, greater financial constraints, higher product market competition, and greater stock return sensitivity to MPS. Overall, our findings highlight the important role of macroeconomic policy uncertainty in shaping corporate financial disclosure.