Author ORCID Identifier

0000-0002-5876-8595

Date of Award

8-8-2023

Degree Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Department

Risk Management and Insurance

First Advisor

Ajay Subramanian

Abstract

This dissertation is comprised of two separate essays: (1) Production Networks and Capital Structure, and (2) Product Variety and Asset Prices.

In the first essay, we develop a dynamic structural model to investigate the relationships among characteristics of an economy's production network—the network of input-output linkages that influence firms' production decisions—and firms' financial decisions. We analytically characterize the equilibrium of the economy and derive novel implications for the impact of the production network on firms' capital structures and default risks. An increase in network concentration leads to lower leverage ratios and default probabilities for larger industries, but higher leverage ratios and default probabilities for smaller industries. Network sparsity has a positive effect on firms' leverage ratios. We then calibrate the model to match relevant identifying moments in the data and obtain quantitative implications for the effects of network characteristics on firms' financial structures and default risk. As proportions of their baseline values, a 20% increase (decrease) in the network concentration alters (i) the mean leverage ratios of the representative firms in the largest, median and smallest industries by -12.4%,66.3% and 254% ( 14.4%,-38.8% and -69.2% ), respectively; and (ii) the mean default probabilities of the representative firms in the largest, median and smallest industries by -17.3%,49.7% and 164.8% ( 25.3%,-30.6% and -62.8% ), respectively. An increase in network sparsity increases the mean leverage ratios of firms in all industries with a 20% increase in network sparsity leading to a 54.3% increase in average industry leverage. We examine how resilient the U.S. production network is to contagion by analyzing how unexpected shocks to industry parameters impact the default probabilities firms in other industries. A 200% increase in the firm-level idiosyncratic volatility in the largest industry leads to a relative increase of 19.2% in firms' default probability in the most impacted industry and generates an average relative increase of 13.3% in the default probability for firms in the remaining industries. A similar percentage increase in the default threshold parameter of the largest industry causes a relative increase of 151% for firms in the most impacted industry and an average increase of 106.7% for firms in the other industries.

In the second essay, we show how product variety affects asset prices in a general-equilibrium model. We analytically characterize the unique equilibrium and estimate the model to match asset pricing and product market moments. The equity premium and risk-free rate can be reconciled for risk aversion levels around 4 and plausible annual discount factors. Our model generates new implications for how product market characteristics influence asset prices. We find that while competition leads to product substitution within industries, product complementarity is observed between industries. The market risk premium decreases with the both the average intra-industry and inter-industry product substitutabilities. We show empirical support for the novel cross-sectional prediction that industry excess returns increase with intra-industry product substitutabilities.

DOI

https://doi.org/10.57709/35827955

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