| This thesis studies the impact of financial constraints on real outcomes, in particular, the fluctuations of output and the allocation of capital between different assets.; By considering yearly production growth rates for several manufacturing industries in more than one hundred countries during (roughly) the last forty years, chapter 1 shows that industries that are more dependent on external finance are hit harder during recessions.{09}The observed difference in the behavior of industries is larger when financial frictions are thought to be more prevalent, linking the result directly to the financial mechanism hypothesis. In particular, more dependent industries are more strongly affected in recessions when they are located in countries with poor financial contractibility, and when their assets are softer or less protective of financiers.; Chapter 2 shows that countries with higher financial development have a lower volatility of industrial output. Volatility is particularly reduced in industries that are more financially dependent. Most of the reduction in volatility is idiosyncratic. Systematic volatility is also reduced, but less strongly so, which implies that correlations of industries with GDP are higher in more financially developed countries. At the firm level, short-term debt growth is less correlated with firm activity as financial development increases, which suggests that short-term debt is more easily used to smooth production. The results indicate that financial development operates by relaxing financial constraints mainly when economic conditions are bad.; Chapter 3 studies the optimal portfolio choice of a representative entrepreneur in a local economy. The assets available include tradable assets and a nontradable investment opportunity. The nontradable asset (e.g. a private business) requires financial wealth and a scarce local resource in order to deliver the consumption good. The competitive equilibrium of the local economy is characterized. In this equilibrium, the expected return of the nontradable asset is endogenously determined. The model delivers an optimal portfolio allocation that is tilted towards the nontradable asset when the risk aversion of the representative entrepreneur is high or when financial wealth is scarce relative to the local resource. |
