Three Essays on Frictions in Financial Markets

Abstract

In the first chapter, I develop and estimate a novel dynamic model of the secondary market trading of intangible assets in an environment where financial market frictions interfere with firm investment. Intangible asset trading (IAT) not only serves as an alternative means of financing but also reallocates investment opportunities to firms in better positions to exploit them. Estimation of the model uncovers high trading frictions, but the option to trade still leads to significant efficiency gains. These gains stem both from IAT's direct effect on relaxing firms' financial constraints and especially from ex ante changes in firms' expectations, which influence their investment choices. I also show that the impact of financial frictions depends largely on the ease with which firms can trade intangibles. Finally, I present corroborating reduced-form evidence that firms sell a particular type of intangible asset, patents, during times of financial distress and their financial conditions appear to improve after these sales.

The second chapter is motivated by the phenomenon that sophisticated financial market participants frequently choose to disclose private information to the public, which is inconsistent with most theories of speculative trading. In this paper, we propose and test a model to bridge this gap. We show that when a speculator cares about both the short-term value of her portfolio and her long-term profit, information disclosure is optimal: Public disclosure in the form of a mixture of fundamental information and the speculator's position induces competitive dealership to revise prices in the direction of the speculator's position. Using mutual fund disclosure through newspaper articles, we find that when fund managers have stronger estimated short-term incentives, the frequency of strategic non-anonymous disclosures about stocks in their portfolios increases and those stocks' liquidity improves, consistent with our model.

In the third chapter, we quantify the impact of bank market power on the pass-through of monetary policy to borrowers. To this end, we estimate a dynamic banking model in which monetary tightening increases banks' funding costs. Given their market power, banks optimally choose how much of a rate increase to pass on to borrowers. In the model, banks are subject to capital and reserve regulations, which also influence the degree of pass-through. Compared with the conventional regulation-based channels, we find that in the two most recent decades, bank market power explains a significant portion of monetary transmission. The quantitative effect is comparable in magnitude to the bank capital channel. In addition, the market power channel interacts with the bank capital channel, and this interaction can reverse the effect of monetary policy when the Federal Funds rate is low.