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Can Central Banks Boost Corporate Investment? Evidence from ECB Liquidity Injections

Author

Listed:
  • Stine Louise von Rüden
  • Marti G Subrahmanyam
  • Dragon Yongjun Tang
  • Sarah Qian Wang

Abstract

Liquidity injections by central banks have become frequent and massive, but their real effects on corporate investment remain unclear. We examine the longer-term refinancing operations (LTROs) of the European Central Bank (ECB) during the eurozone sovereign crisis and show that greater LTRO funding to banks is associated with lower corporate investment. Riskier banks received funds through the LTROs and subsequently increased their holdings of risky sovereign debt. Corporate investment reductions are associated with these banks. Further, concurrent fiscal and regulatory policies impeded the effectiveness of the ECB liquidity injections. Our findings identify the contributing factors for these failures of monetary policy. (JEL E52, E58, G32)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Stine Louise von Rüden & Marti G Subrahmanyam & Dragon Yongjun Tang & Sarah Qian Wang, 2023. "Can Central Banks Boost Corporate Investment? Evidence from ECB Liquidity Injections," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(2), pages 402-442.
    • Handle: RePEc:oup:rcorpf:v:12:y:2023:i:2:p:402-442.
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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