Two Essays in Finance

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Two Essays in Finance

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In Chapter 1, I show that two nominal frictions, nominal debt and price stickiness, combine to create a channel for inflation to affect the real investment and leverage decisions of firms in the cross-section. With nominal debt, a positive inflation shock lowers the real value of current debt, increasing the marginal cost of adjusting debt, and thereby reduces the optimal amount of future debt. Inflation thus reduces the degree of debt overhang, increasing investment. Price stickiness leads to differences in real profitability following inflation shocks that drive cross-sectional differences in investment and leverage. In the US data, firms increase investment and reduce debt in response to positive inflation shocks, while in the cross section sticky-price firms have lower profitability and investment and higher debt than flexible firms after positive inflation shocks. In Chapter 2, coauthored with John Boyd and Abu Jalal, we look at the effects of inflation on nominal contracting in a costly state verification framework. The nominal repayment on a private debt contract does not obey the Fisher equation and is lower than the Fisher nominal rate. We also find that higher levels of expected inflation reduce welfare by increasing the expected costs of monitoring. We document the first result empirically by looking at a panel of interest rates across countries, finding that inflation enters non-linearly. This is not true of government debt, where the Fisher equation appears to hold.



University of Minnesota Ph.D. dissertation. June 2017. Major: Business Administration. Advisor: Frederico Belo. 1 computer file (PDF); v, 73 pages.

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Pokorny, John. (2017). Two Essays in Finance. Retrieved from the University Digital Conservancy,

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