In this dissertation, I explore the relative importance of financial markets for businesses on both firm-level and aggregate outcomes. In my second chapter, I find empirically that local banking conditions are important for firm-level outcomes, in particular for old and small firms. This finding has two implications, each of which I explore in my second and third chapter, respectively.

First, the differential effect across firm age and size suggests sensitivity to financial conditions, or at least to certain financial mechanisms, is correlated with firm characteristics tightly linked with growth (age) and productivity (size). In the quantitative section of my second chapter, I develop a model that is consistent with this differential impact, while at the same time capturing the extreme sensitivity of young businesses to housing prices during the Great Recession.

Second, the importance of local banking markets is confirmation of the importance of geographic segmentation. While recent literature has focused on misallocation induced by financial shocks on misallocation within a geographic location, this finding suggests the potential for misallocation across geographies in the context of the United States. In my third chapter, I develop a framework for investigating the relative importance of misallocation within and across geographies, and I explore different types of shocks considered in the literature. I focus on the impact on labor productivity dispersion, which can be directly attributed to misallocation induced by financial frictions in my framework.