Cash Heterogeneity and the Payout Channel of Monetary Policy

Abstract

This paper provides novel empirical evidence that cash-rich firms have higher equity payouts and higher stock prices in response to expansionary monetary policy surprises. Stock prices rise despite weak cash-flow, investment, and credit responses to monetary policy. I rationalize the empirical evidence in a heterogeneous-firm New Keynesian model where firms finance investment with cash and equity issuance. Monetary easing weakens precautionary cash demand, leading cash-rich firms to optimally allocate excess funds to shareholders. Since payouts are procyclical, cash-rich firms earn higher returns in expansionary periods. My findings highlight a payout channel through which monetary policy impacts asset prices.