| The first chapter studies the link between corporate financing decisions and macroeconomic conditions. It develops a novel search-theoretic approach to the dynamic security design problem of firms issuing different securities, i.e. private (bank) versus public (bond) debt. Embedding the security issue decision into an otherwise standard agency model of firm investment and growth allows for the joint equilibrium determination of firm size and distribution and the structure of financial markets. Firms sign optimal long-term contracts with either banks or bond holders, which are complicated by the fact that managers can divert cash flows to themselves. Bonds are an imperfect substitute for bank debt, since banks (i) enjoy higher protection of their cash flow rights than bond holders; (ii) face capital adequacy constraints imposed by prudential regulation. We derive a recursive characterization of the resulting optimal debt structure and investment. Borrowing constraints endogenously relax and tighten depending both on firms' characteristics and macroeconomic conditions. As the tightness of borrowing constraints is key to determine the optimal trade-off between bank and market debt, plausibly calibrated numerical solutions show that the mix of bank and market debt changes both over firms' life-cycle and the business cycle.;The second chapter constructs a simple dynamic asset pricing model which incorporates recent evidence on the influence of immediate emotions on risk preferences. In good times investors do not "push their luck" and become more risk averse over wealth relatively to consumption. With a realistic consumption growth process and reasonable risk aversion and time preference parameters, the model generates a sizable equity premium, a low and constant risk-free rate, volatile and predictable stock returns, price-dividend and Sharpe ratios in line with the data, and non-negligible welfare costs of aggregate fluctuations. Key for the model to deliver high premia while matching counter-cyclical expected returns is that, under happiness maintenance preferences, a high current consumption-wealth ratio implies high expected future returns since it directly increases the volatility of investors' marginal rates of substitution. Mild pro-cyclical changes in risk aversion over wealth relative to consumption cause large pro-cyclical fluctuations in the current price-dividend ratio which, due to general equilibrium restrictions, translate into counter-cyclical variations in the current consumption-wealth ratio and, in turn, in expected future returns. Field studies find that people systematically mispredict the intensity of their feelings about a given future outcome. In particular, they tend to overestimate the duration of their emotional reactions to negative future events.;In the third chapter, I consider the case of an investor who experiences short-run craving for current consumption and chooses to exert costly self-control of his emotions. The future cost of emotional control depends on his anticipated future utility of financial wealth. The investor tends to overestimate the intensity of his craving. Within a dynamic model of asset pricing I show that there exists a simple direct relationship between the implied excess return on equities over bonds and the size of the investor's misprediction of his future utility. With a realistic consumption process and without relying on unreasonable values of the behavioral parameters, the model accounts for a sizable equity premium, in line with that observed in the US post-war data, and performs well with respect to other financial statistics, such as volatilities of asset returns, Sharpe ratio and mean and volatility of price-dividend ratios. (Abstract shortened by UMI.)... |
