Impact of monetary policy on firm’s risk-taking position and investment decision

Abstract

The recent economic crisis drives monetary policy to boost the economic situation. However, the side effect of monetary policy also dilutes firms' behavior in both risk-taking and investment decisions. This research investigates the effect of monetary policy from the international and local level using firms in 5 Southeast Asia stock markets. The risk and investment decision measurement technique in this paper using Expected Default Frequency and the investment dummy variables. The risk-taking model is based on panel fixed effect regression and the investment decision model is using a fixed-effect logistic model. This paper also extends the analysis to cover the different characteristics of firms (Non-bank and Bank). This paper also examines the extension on risk measurement in banking firms, Distance to capital, to observe the impact of capital adequacy policy in the banking business. The empirical results provide evidence of strong foreign monetary policy impact on all types of firms' behavior. Moreover, the banking firms also affected by local monetary policy especially their investment decision. Lastly, the risk measurement technique extension also proves the significance of capital adequacy policy in the banking business.