Three Essays in Dynamic Corporate Finance
Kahn, Robert
2019
Abstract
This dissertation is composed of three essays. Jointly, the essays emphasize the importance of using microeconomic data combined with dynamic models of the firm to address broader economic questions of relevance to policy makers. The first and third chapter apply dynamic models of the firm to a broader question: how fiscal policy interacts with firms’ financing and investment decisions. They show that dynamic models of firm financing and investment estimated from micro data can produce drastically different results for, in Chapter 1, the costs of government borrowing, and, in Chapter 3, the effects of taxation than standard macroeconomic models, where constraints on debt issuance are binding and dynamic financing behavior is therefore limited. The second chapter concerns best practices in disciplining these dynamic models using micro data, and establishes a set of features of the data that can be used across a wide array of models to estimate parameters and test models. Chapter 1 examines how government borrowing affects firms’ financial decisions and thus investment. Given firms’ financial decisions, government borrowing increases interest rates, and thus harms investment. However, government debt also constitutes a savings vehicle for firms. When government borrowing increases, this savings vehicle becomes more plentiful, allowing firms to avoid financial short-falls in the future and invest with less cost. This second effect hinges critically on the dynamic nature of the financing problem firms face, as the precautionary demand they have for the savings vehicle the government provides is inherently dynamic. Estimating parameters which describe this dynamic problem from panel data on corporate financing and investment since 2000, I find that government borrowing actually increases corporate investment through this dynamic effect. Chapter 2, work with Santiago Bazdresch and Toni Whited, explores how the parameters of dynamic models of corporate finance ought to be estimated from the micro data. In particular, we explore the finite sample properties of simulated method of moments estimators, which are ubiquitous in the literature. Which moments provide good performance in terms of parameter recovery and ability to detect misspecification, and how should these moments be weighted? We establish a set of moments based on the policy functions of firms which can be applied across a wide variety of models in order to recover parameters. Using a Monte-Carlo design, we show that SMM estimators in general have excellent parameter recovery, that test statistics with optimal weight matrices are appropriately sized, and that the tests easily detect even slight misspecification. Chapter 3 explores an extension of the work in Chapter 1. When government debt adds value to the corporate sector by providing a store of liquidity, how should the surpluses which back government borrowing be provided? I consider using taxes on interest income and dividends as means to supply safe assets to the corporate sector. I find that taxes on dividend income can improve outcomes by transferring resources from firms which will be unconstrained tomorrow to firms who desire insurance against financing costs today. Again, the nature of the problem firms face is important: I explore alternative values for pledgeability and costs of financial shortfalls, and find qualitatively different results for the sensitivity of macroeconomic aggregates to corporate taxation. This underscores the importance of using dynamic models whose parameters are estimated from the data for assessing policy counterfactuals.Subjects
corporate finance dynamic models liquidity demand structural estimation safe assets fiscal policy
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