Essays on consumption cycles and corporate finance
This dissertation consists of two chapters that concern with the consumption cycle and corporate finance. The first chapter analyzes the role of durability in characterizing the consumption cycle. There is strong empirical evidence demonstrating that decreases in residential investments and durable expenditures are early indicators of economic downturns. Analogously, once the economy goes into recession, early increases in residential investments and durable expenditures signal economic recoveries. So far, little work has been done detailing the mechanisms explaining these important empirical stylized facts. In this article, I develop a general equilibrium asset pricing production model that includes durability and substitutability between perishable and durable service consumption. Results indicate that large shocks in the productivity of the capital accumulation process and a high elasticity of intertemporal substitution are both needed to create the correct timing of changes in durable expenditures and nondurable consumption characterized in the data. The study also uses this general equilibrium model as a framework to make predictions about the term structure of forward contracts settled on a national housing price index. Such work will create a foundation for further developing this important derivatives market.
The second chapter analyzes the link between debt maturity and the term spread. This chapter is co-authored with Pratish Anilkumar Patel. Evidence shows that a firm's debt maturity and term spread are intricately linked. Firms issue short term debt when the term spread is significantly positive and they increase maturity as the term spread decreases. The current literature explains this link with market frictions such as agency problems, asymmetric information, and liquidity risk. We explain the link between debt maturity and term spread using the trade-off theory of capital structure. When the term spread is small or even negative, transaction costs of debt rollover outweigh bankruptcy costs. Therefore, the firm optimally chooses to increase debt maturity. On the other hand, when the term spread is significantly positive, bankruptcy costs outweigh transaction costs of debt rollover. Therefore shorter debt maturity is optimal as it minimizes the chance of bankruptcy. In addition, we contribute to the current discussion in the literature concerning the speed of adjustments of capital structure, finding that firms are active in adjusting their capital structure. The model is consistent with a variety of stylized facts concerning debt maturity.