Applications of Corporate and Theoretical Finance to Questions in Macroeconomics

The dissertation consists of two chapters. The unifying theme of the dissertation is the application of corporate and theoretical finance to questions in macroeconomics. The first chapter studies the endogenous formation of business relationships and the ability of business partners to support unsecured trade credit, short-term loans between business partners. It shows how trade credit is self-enforcing through the threat of punishment. If firms do not repay, they lose access to future inputs unless they find a new supplier. The paper studies how fluctuations in these arrangements as a result of the Covid-19 pandemic caused a decline in business-to-business sales and total output for some of the largest firms in the United States. This paper was authored solely by the dissertation applicant. The second chapter studies the spillovers arising from collateral-based financial innovation.
Financial innovation is the introduction of new technologies and new products into the financial system, broadening the scope of the market or deepening the scale of what contracts can be traded. Collateral-based financial innovations are now in the popular lexicon, for mortgage-backed securities, collateralized debt obligations, and other asset-backed securities have had a large influence on the U.S. economy in the last forty years. The paper presents a new theory of how financial innovations on one financial asset can have positive or negative price spillovers to unaffected financial assets. Specifically, leverage creates positive spillovers, and tranching and credit-default swaps create negative spillovers. This paper was co-authored with the applicant’s advisor Ana Fostel and another graduate student. Together, the dissertation opens new lines of inquiry into how financial promises (secured and unsecured) influence the macroeconomic allocation of production and consumption.