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

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.