ESSAYS ON MACRO-FINANCE

Abstract

My dissertation investigates the interaction between macroeconomics and finance. It contains three chapters. Chapter 1 studies the private information explanation for the time-series pre-FOMC drift through risk reduction. Using transaction-level data, I document the informed trading is in the same direction of the realized returns in the 24-hour window before FOMC announcements, coinciding with the pre-FOMC uncertainty reduction. I integrate Kyle's (1985) model into a standard consumption-based asset pricing framework where the market makers are compensated for the risk of assets' fundamentals. Observing aggregate order flow, they update the belief about the marginal utility-weighted asset value, which resolves uncertainty gradually and results in an upward drift in market prices before announcements. I demonstrate that there is a strictly positive pre-FOMC drift if and only if the market makers require risk compensation. Chapter 2 is co-authored with Colin Ward. We develop an equilibrium model where cash holdings, costly refinancing policies, and managerial incentives are jointly determined to quantify the market's influence on management's ex ante behavior. We also derive a general formula that shows how agency and financing distortions shape payouts and compensation, two easily measured quantities. Our calibrated model estimates agency conflicts are nearly 10 times more severe than financial frictions for US public firms. Our analysis suggests that cutting corporate income taxes while introducing a tax on refinancing can reduce the relative severity of agency. Chapter 3 is joint work with Luca Benzoni, Lorenzo Garlappi, Robert S. Goldstein, and Julien Hugonnier. We investigate the optimal dynamic debt policy of a firm that issues non-callable debt subject to a fixed cost when shareholders cannot commit to future restructuring policies. We derive necessary and sufficient conditions for the existence of no-commitment Markov perfect equilibria. For a given debt issuance cost parameter, we identify a range of maturities for which equilibria exists and tax benefits are positive. In particular, for realistic values of issuance costs and debt maturity, our no-commitment framework generates equity and debt prices that are only slightly lower than those obtained under a global-optimal policy with commitment.