This complementary paper to Froot, Scharfstein, and Stein (1993) seeks to
explore some of the corporate finance foundations of monetary economics. In
particular, we investigate the impact of corporate risk management strategies
on the monetary transmission mechanism. We employ a simple model of a financial
accelerator (synonymously: a broad credit channel of monetary policy
transmission) to argue that information asymmetries - which are at the heart of
these models of the transmission mechanism - create incentives for corporate
hedging programmes, that is, cash flow management. These policies, in turn,
diminish the impact of monetary policy measures, which is reduced to the pure
cost-of-capital effect.
Keywords: Corporate Finance, Monetary Transmission, Risk Management
