Essays on Asset Pricing and Corporate QE

The expected returns of financial assets should reflect their perceived exposure to risks. In this dissertation, I study the links between asset prices, quantitative easing (QE), and firms’ decision-making, across three essays. While the main purpose of monetary policy is to maintain price stability and, in some economies, full employment, the effects of it are seen directly across financial markets as changes in the attractiveness of investments. Hence, an important potential tradeoff for policymakers is to achieve price stability while maintaining an efficient allocation of capital, both important for maximum economic performance.
In the first essay, I study whether a corporate bond’s sensitivity to changes in the stance of monetary policy is related to its expected return. I introduce a risk factor that produces returns by holding bonds more exposed to innovations in the stance of monetary policy over bonds that have a lower exposure. As the central bank acquires a larger share of the outstanding bonds, investors could potentially re-calibrate their pricing models to factor in risks inherent in firms access to financing that are dependent on the progress towards monetary policy objectives. In the essay, I show that the factor is related to expected returns. I also perform out-of-sample tests of factors introduced in the US setting.
The second essay builds on theory of governance and hypothesizes that with corporate QE, the incentives across the central bank, the managers, and the shareholders are not necessarily aligned. The shareholders, who have the ultimate power, could favor levering up the firm or return capital supplied by the central bank to shareholders while managers could engage in projects that are important to them personally. In the essay, we study the market reaction to firms’ issuance of securities eligible for central bank purchases; and for purchased securities, the use of raised proceeds. The results indicate that there is a significant abnormal stock return when firms announce an eligible bond and that firms use the proceeds to raise cash, lever up, and return capital to shareholders and, to a lesser degree, investments.
In the third essay, I study the stock market reaction to the announcement of the ECB’s corporate sector purchase programme in the cross-section of euro-area firms. The empirical tests show that the introduction of the program benefited eligible firms and firms closer to the eligibility threshold with relatively higher market prices for up to one month after the initial announcement on March 10, 2016. The reaction scaled positively to measures of leverage and negatively to the rate of capital expenditures.