Essays in finance and industrial organization

Abstract

This thesis contains two chapters. In chapter 1, I examine whether reducing the number of firms in public equity markets harms investors, and how much has the value firms can get from going public changed in the past few decades? I develop a dynamic supply and demand model of the firm entry to and exit from public markets to relate firm benefits from being public to firm characteristics. Firms face a dynamic discrete choice problem on whether to be in public markets, with the benefits of being public a function of their characteristics, demand elasticities for their characteristics, and various regulatory and cost of capital changes. My structural analysis allows me to not only break down the causes of the transformation in U.S. public equity markets, but also say what the consequences of them have been for firms and investors. I find that investors would have had slightly higher excess returns but no change in their portfolio's Sharpe ratio if firms behaved as they did before Sarbanes-Oxley. I further find that a private firm's implied option value of going public has fallen by over half since the pre-Sarbanes era. The reduction is mostly caused by an increase to fixed costs of being a public company in the post-Sarbanes era. In the second chapter, I build on traditional models of dynamic oligopoly which assume perfectly frictionless capital markets. This assumption can be relaxed to show that introducing financing constraints can lead to counterintuitive outcomes. When financing constraints are introduced to a standard model of dynamic oligopoly with mergers, the steady state equilibrium probability of monopoly decreases, as opposed to the intuitive expectation that it would increase. This increase is in fact observed in an environment lacking these financial frictions. This result demonstrates that consideration of financing frictions is essential for models of antitrust policy and its effects on welfare outcomes.