| This dissertation consists of two essays. The first essay provides a theoretical explanation for why capital structure varies with macroeconomic conditions. The second essay provides a rational for why potential competitors get funding from a common active investor.; The first essay is motivated by the well documented fact that, debt issues are counter-cyclical and equity issues are pro-cyclical for firms that access public capital markets. However, debt issues do not exhibit this pronounced behavior for small or bank dependant firms. This paper develops a calibrated model that explains these observed variations in financing. In the model, managers issue an optimal combination of debt and equity to finance investment by weighing the trade-off between agency problems and risk sharing. During contractions, leveraged managers receive a relatively small share of output. This results in a relative increase in household wealth and therefore a relative increase in their demand for securities. In equilibrium, securities markets clear as managers increase leverage while satisfying the agency condition that they maintain a large enough portion of their firm's equity. Meanwhile, managers that face high agency costs are up against their borrowing constraints and are unable to borrow more, resulting in an inefficient shift in investment away from these firms in contractions.; Second essay provides a rational for why entrepreneurs seek financing from active investors, such as venture capitalists, who fund potential competitors. In the model, two potentially competitive entrepreneurs must choose whether to go to a common or independent venture capitalists as well as what costly information to contract on. Common industry noise allows a venture capitalist with information from both entrepreneurs to make more accurate inference regarding project quality and ultimately help in taking costly actions efficiently. When contracting with a common venture capitalist, information is processed efficiently but a common agency problem develops since each entrepreneur bargains separately with the venture capitalist. When entrepreneurs contract with independent venture capitalists and on information from both firms, each venture capitalist must separately incur the cost of processing the information. When entrepreneurs contract with independent venture capitalists on only their information the common agency problem as well as costs of processing additional information are avoided but the choice of actions are less efficient. Empirical predictions relating parameters with the entrepreneur's contracting relationship as well as division of surplus are specified in the paper. |
