Corporate Investment Behaviour and Monetary Policy: Evidence from Firm-level Data for Malaysia

Using a panel data-set of over 900 listed firms in Malaysia for the period 1991-2010, this paper examines the empirical evidence on the credit channel of the monetary transmission mechanism within the framework of corporate investment. The results suggest that monetary policy significantly impacts the firms' access to external finance during times of increasing interest rates, in particular, bank-dependent firms are the most vulnerable firms. The firms' investment sensitivity on external financing explains the relatively underdeveloped capital market and the prominent role played by the banking sector for capital allocation in the Malaysian economy. Internal finance is more important for high leverage firms during tight liquidity conditions.