Three Essays On Information Transmission In Financial Markets PDF Download

This dissertation explores various empirical financial phenomena. The first chapter presents evidence suggesting long-term uncertainty may be one reason firm activity has been slow to recover from the Great Recession. I show the current level of uncertainty and expectations of future uncertainty -- that is, the entire term structure of uncertainty -- are negatively correlated with firm investment rates. I present a simple model generating these effects through real options channels. Using equity options to obtain forward-looking estimates of firm and aggregate uncertainty at different horizons, I then show that both the level and slope of the term structure of uncertainty have negative conditional correlations with capital investment rates, consistent with the model. Numerically, a one standard deviation increase in firm (aggregate) uncertainty over the next 30 days correlates with a decrease in firm capital investment equal to 5.1% (1%) of the mean firm investment rate over the next quarter. A one standard deviation increase in firm (aggregate) uncertainty over the next year relative to the next 30 days correlates with a decrease in firm capital investment equal to 3.1% (4.4%) of the mean firm investment rate over the next quarter. I also find the correlation between both the level and slope of the term structure of uncertainty and R\ & D to be positive, supporting the theory that firms invest in growth options in the face of uncertainty. I discuss identification in this context and the particular relevance of my findings for government policy. The second chapter is co-authored with Ana Gomez Lemmen-Meyer and Enrique Seira. We establish four stylized facts about firm financing in private credit markets using a unique, comprehensive database of corporate loans in Mexico. First, firms receive a lower interest rate upon moving from one bank to another. Second, banks' pricing behavior toward their customers exhibits the "lock-in effect": firms' interest rates increase the longer they stay in a lending relationship with the same bank. Third, in a market where asymmetric information between banks has been mitigated, banks appear to compete for the highest quality borrowers and there is little evidence of adverse selection among switching firms. In fact, borrowers that switch banks appear to be of higher average quality than similar borrowers that do not. Fourth, firms that change lenders receive other more favorable lending terms after the change of lenders than they had prior to the change. These take the form of longer maturity loans and less required collateralization, providing positive evidence related to the hypothesis that banks compete for firms not just on interest rates, but also through other lending channels, and that firms switch banks to improve their lending terms. We document how these facts differ by firms' size, and note that the Mexican commercial credit market is really two markets: one for credit to large firms and one for credit to small firms. Finally, we explain how specific policies may have led to the environment giving rise to these stylized facts, discuss the implications of our findings for models of relationship lending and firm banking, and present a simple model rationalizing our results. The final chapter is co-authored with Todd Mitton and Keith Vorkink. In it we explore what may drive financial "bubbles" in speculative markets. Speculative behavior plays a key role in financial markets, but little is known about its causes. We test for neighborhood effects on speculative behavior using lottery sales data, allowing us to disentangle the effects of investor enthusiasm and information transmission. In a sample of 160,000 retailers, per capita lottery sales in a given census block increase by $0.26, on average, when per capita lottery sales increase by $1 in neighboring blocks. Exogenous variation in geographic barriers to interaction between neighbors suggests that the results may be driven largely by social interaction. Our analysis demonstrates a link between social interaction, investor enthusiasm, and speculative behavior that has important implications for financial markets, and may explain why financial bubbles occur.