Abstract: This paper analyzes the impact of monetary policy shocks on firms' spending patterns using a panel of publicly-listed US firms. Delineating the uses of finance into payouts to shareholders and physical or intangible investments, I find evidence in favor of a rise in payouts' sensitivity to monetary policy changes driven by equity repurchases. In contrast, the sensitivity of real investments remains unchanged. In response to lower interest rates, firms buy back equity above free cash flow and simultaneously issue debt, suggesting a rise in financed payouts. The paper finds suggestive evidence for the role of debt issuance in the transmission of monetary policy to firm-level payouts. The set of unconstrained firms with larger asset size, longer-term debt maturity, better debt servicing ability, and lower ex-ante liquidity drive the increase in sensitivity, suggesting that only the firms with more robust balance-sheet characteristics engage in financing of payouts. However, the sensitivity of real investments to monetary policy changes is lower for firms that finance payouts.

Abstract: Asset-quality forbearance during the global financial crisis allowed banks to lower capital provisioning requirements for loans under temporary liquidity stress and provides a policy experiment to examine credit allocation efficiency. Matched bank-firm data from India show that stressed banks also significantly increased lending to low-solvency firms. Moreover, in industries and bank-portfolios with high proportions of zombie firms, credit was reallocated away from solvent to zombie firms, a pattern that persists even after forbearance is withdrawn. Our findings suggest that forbearance provided banks with an incentive to hide true asset quality, and a license to engage in regulatory arbitrage- the build-up of stressed assets in India's predominantly state-owned banking system is consistent with accounting subterfuge.