The effects of monetary policy on stock returns: Financing constraints and "informative" and "uninformative" FOMC statements

We use firm-level data to reexamine the issue of possibly different impacts of "informative" and "uninformative" FOMC statements on stock returns in the period from 1999 to 2007. Our paper finds that stock returns respond significantly to surprise monetary shocks based on the informative FOMC statements; there is little evidence to show that stock returns respond to surprise monetary shocks based on uninformative statements.We ask how these impacts respond to the relative ability of firms to obtain external finance. Our results indicate that the stock returns of firms that are financially constrained still respond significantly more to monetary policy shocks than less constrained ones based on the informative statements. By comparing firms with medium and low capacities for external finance based on the informative statements, it is found that firms with low capacity for external finance are more significantly affected by the impacts of a surprise monetary policy action than firms with medium capacity for external finance. However, when controlling the capacity for external finance, a monetary surprise has no significant impact on stock returns based on the uninformative statements.We also find that the response of stock returns to a negative target surprise is significant. However, the response to a positive target surprise is insignificant, which implies that market investors respond more rationally to good news (negative target surprises) than to bad news (positive target surprises). For a good news monetary shock, informative statements have larger impacts on stock returns than uninformative statements. However, for a bad news monetary shock, neither informative nor uninformative statements have significant impacts on stock returns.