Essays on Finance and Macroeconomy

Abstract

Understanding how micro market frictions affect the transmission of macroeconomic risks has been a central research interest in macro-finance. The primary focus of my dissertation contributes to understanding the role of financial and labor market frictions in the impacts of macroeconomic risks on credit and capital allocation, corporate decisions, and asset prices. It also generates a new perspective for policy implementations in credit and labor market regulation.In Chapter one, I propose a novel channel for the transmission of monetary policy involving shifts in firms’ debt structures, the credit substitution channel. Unexpected monetary tightening is associated with a contraction in aggregate corporate bonds but an expansion in business loans. The increase in the loan volume can be explained by the countercyclical demands for loan financing among large unconstrained firms. Using microdata, I demonstrate that large, high-rated firms with low default risk rebalance toward bank loans and away from corporate bonds as the spread of bonds over loans increases. This substitution crowds out banks’ lending to small firms, forcing them to raise more equity. I develop a heterogeneous-agent New Keynesian (HANK) model that features debt heterogeneity and credit market frictions to rationalize these empirical findings. In the model, bank loans are senior and safer (collateralized) than defaultable bonds but issued at a greater intermediation cost. Frictions in the flow of liquidity to small firms suggest a role of credit substitution in propagating downturns: small, risky firms disproportionately reduce their investment in response to interest rate hike. Chapter two is co-authored with Jack Favilukis, Xiaoji Lin, and Xiaofei Zhao. We identify a new channel through which financial intermediary labor leverage affects risk and the real sector. Financial intermediaries are stressed when their labor share is high. Financial intermediary labor share negatively forecasts growth of aggregate output, investment, and credit lending, and it positively forecasts market excess returns and cost of borrowing. In the cross-section, financially constrained firms connected to banks with higher labor shares borrow less but pay more and have lower investment and earnings growth. Chapter three is joint work with Xuelin Li, Richard Thakor, and Colin Ward. We build a novel structural model that features a dynamic agency conflict and knowledge spillovers to assess how labor mobility affects intangible investment. Our calibration to US data targets responses of employee turnover and firms’ intangible investment to variation in workers’ outside option values that are identified by state-level changes in degrees of non-compete enforcement. Counterfactual analysis finds that the current degree of restrictions across states on labor mobility are close to being optimal.