Chryssi Giannitsarou, University of Cambridge

"The Investment Channel of Monetary Policy when Managers Have Skin in the Game"

Abstract

We examine how stock-based compensation and the resulting managerial stock ownership affect firm investment decisions and the transmission of monetary policy. Using data from Compustat and ExecuComp covering over 3,000 U.S. listed firms from 1992 to 2023, we employ local projections to estimate dynamic responses to monetary policy surprises. Our empirical findings reveal that higher managerial stock ownership significantly amplifies firms’ investment responses to monetary policy shocks. This responsiveness is primarily driven by stock options rather than direct stock holdings, with estimated effects of 25 basis point expansionary monetary policy surprises increasing cumulative investment rates by 0.58 and 0.88 percentage points at median and average ownership levels respectively. To provide theoretical support for these empirical findings, we develop a parsimonious model featuring agency frictions between managers and shareholders, where managerial compensation includes both stock and option components. The model predictions align with our empirical results, generating a stronger response in the presence of options rather than stocks.

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