Three Essays in Empirical Financial Economics

Abstract

In this thesis, I add to the literature which uses microdata to assess how economic outcomes are influenced by the financial condition of firms and households. In my first chapter, I analyze whether leverage impacts the growth rates of capital expenditures and employment for US and Canadian publicly traded firms in a non-linear manner. I find that the negative marginal impact of leverage on future growth tends to be higher for firms in higher leverage quartiles for firms with similar growth prospects. I also show that for firms with similar leverage, the impact of leverage on future growth is larger for firms with low growth opportunities compared to those with better growth opportunities. These findings provide new evidence supporting the use of debt to reduce the agency conflicts between shareholders and managers for firms with low growth opportunities. The second chapter of my thesis challenges the findings of a lead AER article which had analyzed how a firm's investment responds to changes in its collateral values. I demonstrate that their results are highly sensitive to arbitrary Winsorization thresholds. I also show that a firm's investment responds to shocks to national real estate prices rather than shocks to the value of collateral it actually owns. The extent to which real estate shocks affect corporate investment---the collateral channel---therefore, remains an open question. The final chapter of my thesis analyzes the impact of macroprudential housing finance rules changes in Canada between 2005 and 2010. I start by combining loan-level administrative data with household-level survey data to determine the financial condition of potential first time homebuyers in Canada. I then use a microsimulation model of mortgage demand to determine the impact of rule changes on potential first time homebuyers. Policies targeting the loan-to-value ratio are found to have a larger impact than policies targeting the debt-service ratio, such as amortization. In addition, I show that loan-to-value policies have a larger role to play in reducing default than income-based policies. Disclaimer, the views in this thesis are mine and do not necessarily reflect those of the Bank of Canada.