Three Essays on Empirical Financial Economics

Abstract

This thesis includes three essays on empirical financial economics. The essays discuss factors determining the firm-level cost of borrowing and their impact on aggregate firm investment. The first essay (Chapter 2) shows how capital structure, in particular, asset durability affects the cost of external financing and firm investment in the presence of financial frictions. The second essay (Chapter 3) highlights the importance of macroeconomic factors in determining the cost of borrowing as measured by credit spreads. The third essay (Chapter 4) discusses how asset durability affects the transmission of monetary policy. In the second chapter, I use the depreciation rate to measure asset durability and find financing frictions can affect firm investment through the asset durability channel. Specifically, asset durability increases external financing costs for financially constrained firms, but the effect is ambiguous for unconstrained firms. Additionally, I find when firms endogenously choose asset durability, more(less) financially constrained firms invest in less (more) durable capital. These results provide mixed support to the idea that the durability of an asset impedes financing. The third chapter focuses on the importance of macroeconomic factors relative to financial factors in determining credit spreads in the Canadian corporate bond market. I find that although the macroeconomic determinants both in their levels and volatilities have significant effects on credit spreads, their contribution in explaining the variations in spreads is relatively small. Much of the variation in spreads attributes to the unobserved bond-specific heterogeneity. The fourth chapter builds on the findings from the second chapter to show the heterogeneous response of firms with different asset durability to monetary policy. I find that firms with more durable assets are more responsive to monetary policy than firms with less durable assets. For financially constrained firms, this difference is more prominent. Additionally, less durable assets using firms drive the decline in aggregate sales, while the more durable assets using firms dominate the decline in aggregate inventories. Overall, the findings highlight the role of asset durability in the transmission of monetary policy.