Essays on financial frictions
MetadataShow full item record
This dissertation investigates agents’ behavior in a world with financial frictions such as financial regulations and information asymmetries. The three chapters of the dissertation are devoted to answering the following questions: Does financial regulation slow credit supply growth by imposing higher lending standards on banks? How does business volatility contribute to the declining firm entry rate in recent decades through credit channel? How does a financially distressed firm respond to risks when it is deemed "too big to fail"? Although widely acknowledged for enhancing financial stability, the Dodd-Frank Act (DFA) has continued to attract criticisms arguing that it contracts credit supply, and, as a consequence, reduces GDP and creates pressure on unemployment. In chapter I, I provide empirical and theoretical evidence on DFA’s negative impacts on credit supply. Based on a structural banking model, I find that DFA has reduced credit supply by at least 3.1% of the current volume of bank credit. This sizable loss partially validates the concern that the Wall Street reform put a strain on the economy and prevented it from fully recovering through credit channels. In chapter II, I present empirical and theoretical evidence suggesting that unexpected surging economic uncertainty hurts startups through credit channel: rising default rates accompanying heightened economic turbulence drive up credit spreads. With startups facing increasing funding costs, entry barriers go up and entry rates decline. Through simulations of an industry model incorporating dynamic entry and exit, I show that unexpected uncertainty shocks can generate larger and more persistent impact on economic outputs in a world with financial frictions than that without the frictions. In Chapter III, I argue that the risk-taking behavior of a financially distressed firm is exacerbated if the equity holders have larger bargaining power over debt holders. Using a firm’s valuation model which permits the endogenous default on the debt, I show that the threshold value triggering risk-taking behavior is positively related to the equity holders’ bargaining power in debt renegotiations. Therefore, firms anticipating a final bailout intentionally undertake more risky investments.