Essays on Macroeconomics and Corporate Financing Decisions

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Park, Jongho
Shea, John
This thesis comprises two studies in the relationship between corporate firms' financing decisions and business cycles. In the first chapter, I propose a transmission mechanism linking uncertainty shocks to macroeconomic variables through firms' financing decisions, with an emphasis on the role of equity financing. When uncertainty is high, equity issuance is limited, as firms are less likely to generate positive profits, and are more tempted to divert profits. As a result, external equity financing shrinks, and this generates additional amplification since total equity financing decreases. Based on this mechanism, I address two questions. First, how are equity financing decisions and associated agency costs affected by uncertainty shocks, and how does equity amplify the response of macroeconomic variables to uncertainty shocks? I build a DSGE financial accelerator model with both debt and equity financing that generates amplification of macroeconomic variables in response to uncertainty shocks. The troughs of macroeconomic variables generated by my model are approximately 30 percent deeper compared to a standard model with only a debt contract. The amplification allows the model to predict procyclical debt and equity financing, and countercyclical external financing costs, a combination which existing models are unable to explain. Second, how does uncertainty affect corporate firms' equity financing decisions empirically? Using balance sheet data of U.S. listed firms from 1993 to 2014, I find that a one standard deviation increase in the level of uncertainty is associated with a 0.7 percentage point decrease in the ratio of equity financing to total assets. In the second chapter, we study the influence of external financial factors on economic activity in emerging economies (EMEs), motivated by a considerable increase in foreign financing by the corporate sector in EMEs since the early 2000s, mainly in the form of bond issuance. We build a quarterly external financial indicator for several EMEs using bond-level data on spreads of corporate bonds issued in foreign capital markets, and examine its relationship with economic activity. Results show that this indicator has considerable predictive power for future economic activity. Furthermore, an identified adverse shock to the financial indicator generates a large and protracted fall of real output growth. About a third of the forecast error variance for output is associated with this shock. These findings are robust to controlling for possible spillovers from sovereign to corporate risk, among other considerations.