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Doctoral Student Supervision (Jan 2008 - Nov 2020)
An important focus of the financial literature has been the role of legal institutions in the development of financial markets, and its impact on the long-run economic growth and welfare.This work contributes to this literature by studying the impact of three legal institutions on asset prices, the decisions of firms and households, and the sustainability of regulated markets. The first legal institution considered in this thesis is the personal bankruptcy code. Specifically, I study how the protection that this institution provides to households impacts the loan market equilibrium. The second legal institution is the total allowable catch (TAC) in the fishing industry. This institution limits the annual catch of a renewable resource (fish) in a geographic area. I research how to define the exploitation limits incorporating financial incentives to the problem, and if this institution can help to achieve a financially and ecologically sustainable harvest. Finally, the third legal institution studied in this thesis is the tax code, specifically, how the treatment of corporate losses, and the possibility of carrying them forward in time, ties in with the future equity risk and return of a firm.All institutions are described in detail and discussed empirically and theoretically. The results of my research show that they have a significant impact on the decisions of market agents and in the determination of asset prices. From the study of the personal bankruptcy code, I find that higher household protection at bankruptcy relates to a lower quantity of loans to households, and lower delinquency rates, indicating that riskier households are being priced out of the market, affecting their welfare. With respect to the TAC regulation, I find that for a representative fishery it is optimal to preserve a significant part of the resource for future harvesting, even in the presence of multiple sources of uncertainty. Finally, after evaluating the effect of Tax Loss Carry Forwards on the firms’ risk and returns, I find that its magnitude is highly significant in positively forecasting standard equity risk measures, that they significantly predict equity returns, even when accounting for standard measures of risk.
This thesis contains two essays in Structural Corporate Finance. The first essay studies the effect of asset redeployability on the cross-section of firms’ financial leverage and credit spreads. Particularly, I show that in the data firms’ ability to sell assets — captured by a novel measure of asset redeployability — correlates positively with financial leverage, and negatively with credit spreads. At odds with traditional notions of asset redeployability, I show that these predictions remain even after controlling for proxies of creditors’ recovery rates. To understand these empirical findings, I build a quantitative model where firms’ asset redeployability decreases the degree of investment irreversibility and deadweight cost of bankruptcy. According to the model, while higher overall asset redeployability predicts larger financial leverage and lower credit spread; these relations are mainly driven by differences in the degree of investment irreversibility across firms. Also, within the model, differences in recovery rates are mainly explained by differences in deadweight costs of bankruptcy. Based on these results, I conclude that the link between firms’ asset redeployability and disinvestment flexibilities is key to understand the empirical ability of asset redeployability to predict financial leverage and credit spreads. The second essay provides new evidence about the cross-sectional distribution of debt issuance: its dispersion is highly procyclical. Furthermore, I show that this dynamic feature is mainly driven by large adjustments of the stock of debt and capital observed in good times. Previous research has highlighted the role of non-convex rigidities on inducing large adjustments on firms decisions. Then, to quantify the contribution of real and financial non-convex frictions on shaping the dynamic of the debt issuance cross-sectional distribution, I build a quantitative model where firms take investment and financing decisions. According to the model, both real and financial non-convex frictions are required to reproduce the dynamic of the cross-sectional dispersion of debt issuance. Indeed, the presence of these frictions makes firms’ decisions less responsive during recessions. Yet, in booms, both non-convex costs induce large adjustment on the capital and debt stock of high-growth firms.