College of Behavioral & Social Sciences
Permanent URI for this communityhttp://hdl.handle.net/1903/8
The collections in this community comprise faculty research works, as well as graduate theses and dissertations..
Browse
6 results
Search Results
Item Foreign Direct Investment in Authoritarian States(2023) Englund, Chase Coleman; Allee, Todd; Government and Politics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)In this dissertation, I examine autocracies and demonstrate why some autocratic regimes attract considerable investment whereas others do not. I advance two primary claims. The first is that autocratic regimes in which there is political competition actually receive less FDI than those in which there is less competition. Autocratic states tend to have weak institutional protections for investors, which causes greater uncertainty for businesses that fear costly policy changes. Therefore, when political competition in autocracies is greater, investors become more cautious and FDI inflows decline. The second claim is that FDI is more targeted to certain sectors in autocratic states with less political competition. This is because autocratic leaders seek to use FDI as a private good to favor members of their winning coalition. Therefore, autocrats with smaller coalitions (i.e., less political competition) will use policy to steer the benefits of FDI more narrowly. This is important because the use of FDI as a private good in this way tends to entrench authoritarianism. In analyzing both claims, I also examine the relative number of economic elites in a state, which I argue is an important and fundamental indicator of competition over policy (alongside the political measures), because it determines the size of an autocrat’s winning coalition. I find strong support for both of these hypotheses, using a wide range of novel data that I have compiled from several unique sources and various private organizations. I examine the volume and sectoral concentration of FDI in thousands of cases involving more than 100 non-democratic states over a 42-year period, beginning in 1980. In order to measure foreign investors’ perceptions of the policy environment in nondemocratic states, I also utilize data from an automated textual analysis of quarterly earnings calls of publicly traded firms located in authoritarian settings. Even after controlling for other factors, I first find that greater political competition is associated with greater perception of risk by foreign investors and lower FDI inflows. To measure the number of economic elites relative to economic activity, I employ a novel measure of stock market concentration that estimates the degree to which a market is either oligarchic or diversified. These results are important and timely because many of the largest recipients of FDI globally are now autocratic states. This means that large segments of the global population will depend on authoritarian governance to attract FDI, which is widely considered important to global economic development. Furthermore, understanding whether or not we can expect FDI to have a democratizing impact on autocratic government is crucial to developing expectations about how FDI will shape global politics in the decades to come.Item Essays on Firm Financing, Investment, and Growth(2019) Penciakova, Veronika; Kalemli-Ozcan, Sebnem; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation studies the relationship between firm financing, investment, and growth. Chapter 1 makes use of a unique dataset that combines ownership data, Census Bureau data, and patenting data to study whether firms held by owners with more diversified business interests engage in more growth-enhancing risky innovation. I document that higher owner diversification leads to riskier innovation, after taking into account firm life cycle characteristics, access to finance, other features of ownership structure, and inherent firm and owner characteristics. I also provide evidence that diversification matters at the sector level, with sectors characterized by higher diversification exhibiting higher risky innovation, revenue, volatility, and growth. I present a stylized model that rationalizes these empirical findings. Chapter 2 studies the financial leverage of U.S. firms over their life-cycle and the implications of leverage for firm growth and response to shocks using a new dataset that combines private firms' balance sheets with Census Bureau data. We show that firm age and size are good predictors of leverage for private firms but not for publicly-listed ones. Using the Great Recession as a shock to financial conditions, we show that during the Great Recession leverage declines for private, but not public firms. We also provide evidence that private firms' growth is positively associated with leverage, while public firms' growth is not. Chapter 3 explores the extent to which interest rate fluctuations during sudden stops contribute to resource misallocation and explain the sharp decline in productivity observed during these episodes. Using firm-level data from Chile, I show evidence of rising misallocation during the 1998 sudden stop and evidence of hiring and investment frictions that could trigger this rising dispersion and subsequent decline in productivity. I then study the contribution of interest rate level and volatility shocks to this rise in misallocation using a small open economy model featuring heterogeneous firms that are subject to non-convex capital and labor adjustment frictions and calibrated using firm-level data from Chile. The model is qualitatively consistent with the rise in dispersion of marginal products and the decline in productivity observed during the sudden stop crisis.Item Essays on Macroeconomics and International Finance(2017) Leon-Diaz, John Jairo; Aruoba, Boragan; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)My doctoral research contributes to the fields of macroeconomics and international finance. Within macroeconomics, I have explored the role of financial frictions in shaping macroeconomic outcomes following a recession. I have studied the dissonance between the rapid improvement in financial conditions and the sluggish recovery in investment observed in the aftermath of the Great Recession. In related research I also analyze the fast improvement in financial conditions and analyze the existence of a positive feedback between asset prices and leverage through the lens of liquidity shocks. Within international finance, I have an empirical and theoretical interest in the analysis of capital flows. My research in this area has focused on the role of domestic investors in preventing economies from experiencing the largely-documented pervasive effects of net sudden stops in capital flows, and its determinants. Chapter 1. The rapid improvement in financial conditions and the sluggish recovery of physical investment in the aftermath of the Great Recession are difficult to reconcile with the predictions of existing models that link impaired access to credit and investment. I propose a tractable model that solves this puzzle by exploiting the role of customer markets in shaping the persistent effects of financial shocks on investment decisions. In my model, firms react to a negative financial shock by reducing expenditures in sales-related activities and increasing prices to restore internal liquidity, at the expense of customer accumulation. Once financial conditions start reverting to normal levels, the firm postpones investment due to a shortage of customers relative to its existing production capacity and the need to first rebuild its customer base. This mechanism can capture two important features of the data: First, the slow recovery of investment despite improving financial conditions, and second, the positive correlation between financial conditions and investment observed during downturns and the weakening of this correlation observed during upturns. Chapter 2. I assess how the inclusion of complementary sources of liquidity can have sizeable reinforcing effects during a crisis and in its aftermath. In this paper, I allow for the possibility to finance investment projects either by selling existing capital units or by borrowing using the units not sold as collateral. The main characteristic of this model is that capital is heterogeneous and composed by units of different quality, which are only observed by the owner. The asymmetric information on capital quality makes both, the asset prices at which investors can sell their assets and the loan-to-value (i.e. leverage) ratio at which they can borrow to be endogenously determined. The simultaneity in the determination of asset prices and leverage lead to the existence of liquidity spirals. For instance, a negative exogenous shock that reduces leverage creates a fall in the funds available to finance capital purchases (i.e. a decline in demand). It also increases the supply for assets in the market, since entrepreneurs require selling more units to finance the same amount of investment. These two effects create unambiguously a fall in prices. The fall in prices reinforces the initial fall in loan-to-values since lenders expect the quality of units used as collateral to be lower. This mechanism explains why alternative sources of liquidity fall rapidly during downturns, and why liquidity can recover faster during upturns. Chapter 3. This paper, which is joint work with Eduardo Cavallo and Alejandro Izquierdo, explores the determinants behind the decision of domestic investor to adjust their asset position in response to a variation in gross capital inflows and avoid episodes of net sudden stops. We present evidence that while sudden stops in gross inflows are associated with global conditions, domestic factors such as the degree of domestic liability dollarization, economic growth and institutional background are important to prevent these episodes in becoming net sudden stops. We also extend the concept of “Prevented Sudden Stops” and differentiate “Delayed” from “Purely Prevented” episodes. A purely prevented episode is one in which there is not a sudden stop in any of the quarters for which there was a sudden stop in gross inflows. A delayed episode is one in which there is at least one quarter in which there was both a sudden stop in gross inflows and a net sudden stop. We want to analyze how this classification can affect the extent to which economic growth and domestic liability dollarization can still account for the offsetting behavior of domestic investors.Item Essays on Uncertainty, Imperfect Information, and Investment Dynamics(2016) Jia, Dun; Aruoba, Boragan; Stevens, Luminita; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Understanding how imperfect information affects firms' investment decision helps answer important questions in economics, such as how we may better measure economic uncertainty; how firms' forecasts would affect their decision-making when their beliefs are not backed by economic fundamentals; and how important are the business cycle impacts of changes in firms' productivity uncertainty in an environment of incomplete information. This dissertation provides a synthetic answer to all these questions, both empirically and theoretically. The first chapter, provides empirical evidence to demonstrate that survey-based forecast dispersion identifies a distinctive type of second moment shocks different from the canonical volatility shocks to productivity, i.e. uncertainty shocks. Such forecast disagreement disturbances can affect the distribution of firm-level beliefs regardless of whether or not belief changes are backed by changes in economic fundamentals. At the aggregate level, innovations that increase the dispersion of firms' forecasts lead to persistent declines in aggregate investment and output, which are followed by a slow recovery. On the contrary, the larger dispersion of future firm-specific productivity innovations, the standard way to measure economic uncertainty, delivers the ``wait and see" effect, such that aggregate investment experiences a sharp decline, followed by a quick rebound, and then overshoots. At the firm level, data uncovers that more productive firms increase investments given rises in productivity dispersion for the future, whereas investments drop when firms disagree more about the well-being of their future business conditions. These findings challenge the view that the dispersion of the firms' heterogeneous beliefs captures the concept of economic uncertainty, defined by a model of uncertainty shocks. The second chapter presents a general equilibrium model of heterogeneous firms subject to the real productivity uncertainty shocks and informational disagreement shocks. As firms cannot perfectly disentangle aggregate from idiosyncratic productivity because of imperfect information, information quality thus drives the wedge of difference between the unobserved productivity fundamentals, and the firms' beliefs about how productive they are. Distribution of the firms' beliefs is no longer perfectly aligned with the distribution of firm-level productivity across firms. This model not only explains why, at the macro and micro level, disagreement shocks are different from uncertainty shocks, as documented in Chapter 1, but helps reconcile a key challenge faced by the standard framework to study economic uncertainty: a trade-off between sizable business cycle effects due to changes in uncertainty, and the right amount of pro-cyclicality of firm-level investment rate dispersion, as measured by its correlation with the output cycles.Item Capital Inflows, Financial Development, and Credit Constraints at the Firm Level: Theory and Evidence(2012) Armenta Reales, Armando Jose; Vegh, Carlos; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation is composed of two related essays on the effects of periods of large capital inflows on macroeconomic aggregates and financing constraints at the firm level, and the relationship of the differences in these effects among developed and emerging economies with the degree of financial development. In the first essay I conduct an empirical exploration of this topic. I show that periods of large capital inflow are associated with more volatile macroeconomic outcomes in economies with a low degree of financial development, relative to economies with more developed financial systems. Employing firm level data for 42 countries, I show that firms in economies with a low level of financial development exhibit a relatively larger loosening in the cost of borrowing and a larger appreciation in equity prices. I show that financing constraints are more prevalent in firms located in countries with a low degree of financial development. Moreover, periods of capital inflow booms relax these financing constraints. This decrease is significant regardless of the composition of capital inflows, stronger when coupled with domestic credit booms, larger for firms in the non-tradable sector and larger for firms that depend more heavily on internal funds to finance their investment opportunities. In the second essay, using a theoretical model, I explain the larger aggregate response around capital inflow booms, as arising from varying degrees of financial development, and their relation to the pervasiveness of credit constraints at the firm level. I propose a heterogeneous agents model in which the share of borrowing-constrained agents depends on the level of financial development. Agents in an economy characterized by a low degree of financial development can use a lower share of their assets, measured at their market value, as collateral to secure debt. I show that a period of large capital inflow causes an increase in the demand for capital for both unconstrained and constrained firms. At the initial valuation of capital, only unconstrained firms can freely adjust their demand for capital. However, the increase in the aggregate demand for capital increases its valuation and thus generates a loosening in financing constraints for ex-ante constrained firms, and an amplified response at the firm level and on macroeconomic aggregates.Item Essays on Business Economics(2011) Sertsios Belmar, Giorgo T; Betancourt, Roger R; Phillips, Gordon M; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation consists of three essays, of which two are related. In the first essay I model the interaction between a franchisor and its franchisees. I examine how a franchisor uses the investment requirements she asks franchisees as a tool to reduce franchisees' underprovision of sales effort. Theoretically, I show that if the franchisor's reputation is highly important the franchisor asks for higher investment requirements when penalizing a misbehaving franchise is more difficult (weaker law enforcement) and when directly monitoring franchisees is more costly. In the second essay, I empirically test the theoretical predictions of the first essay using two datasets at the franchisor level. I measure weak law enforcement using the passing of state level good-cause termination/nonrenewal laws for franchise contracts and I measure monitoring costs using the number of states in which a franchisor operates. Using a database that contains information for 278 franchisors, before and after the laws were passed in some states, I find that the passing of the laws implied an incremental 4.7% increase in investment requirements for franchisors located in states where the laws were passed. Using a large database (10,047 franchisor-year observations), posterior to the passing of the laws, I find that franchisors located in states where good-cause termination/nonrenewal laws were passed ask for investment requirements 4.5% higher than franchisors located in states without such laws. Using both datasets I find evidence that franchisors that expand their operations to an additional state increase the average investment requirements they ask a prospective franchisee between 0.6-1%. The third essay, which is in conjunction with Gordon Phillips, empirically studies how financial distress and bankruptcy affects firms' choices of product quality and prices using data from the airline industry. We find that an airline's quality and pricing decisions are differentially affected by financial distress and bankruptcy. Product quality decreases when airlines are in financial distress, consistent with financial distress reducing a firm's incentive to invest in quality. In addition, firms price more aggressively when in financial distress consistent with them trying to increase short-term market share and revenues. In contrast, in bankruptcy product quality increases relative to financial distress periods.