Essays in financial economics
- This thesis studies how information affects trading and firm investment. In the first chapter I examine the conditions for the no-trade theorem to hold in multiperiod consumption settings and show it no longer holds in many reasonable scenarios. In situations where agents have different concerns for intertemporal substitution, information-based trade can be mutually acceptable because it enables agents to readjust their consumption profiles based on future consumption shocks. I show that the existing literature that finds no-trade results in various multiperiod consumption settings crucially depends on specific preference assumptions that lead to risk aversion dominating concerns for intertemporal substitution. The no-trade theorem fails to hold when a wider range of utility functions with a more important role for intertemporal substitution are considered. Chapter 2 presents quantitative analysis on the intertemporal substitution as a rational channel to generate trading. Intertemporal substitution bridges information-based trading and consumption-based asset pricing. Consumption-based asset pricing models are natural candidates to analyze information-based trading, and information-based trading affects the volatility of individual consumption processes. Quantitative analysis demonstrates that besides asset pricing implications, information-based trading related to intertemporal consumption smoothing can also explain a significant part of the trading volume observed in financial markets. Finally, Chapter 3 studies how a firm's growth is affected by the evolution of its external debt financing environment. Asymmetric information about the qualities of projects the firm can undertake makes external financing costly. Collateral can mitigate this problem, but its availability is limited by the size of the firm. As a firm grows, more collateral becomes available, broadening the firm's access to external debt financing channels and lowering its cost of capital. The firm's growth decision is affected by how effective additional collateral can be in lowering its cost of capital and the amount of assets it needs to accumulate to broaden its access to potential lending channels. A small firm may optimally choose to stay small when it is financially constrained and far from the size necessary to have access to formal lending. When the size of a small firm approaches the level needed to have access to formal lending there arises a strong incentive to expand, making the firm locally risk loving. The framework I study also raises some questions about the frequent use of a firm's growth rate as an empirical proxy for firm value. I show that a high growth rate is not necessarily associated with high firm value.
|Type of resource
|electronic; electronic resource; remote
|1 online resource.
|Stanford University, Graduate School of Business.
|DeMarzo, Peter M
|DeMarzo, Peter M
|Statement of responsibility
|Submitted to the Graduate School of Business.
|Thesis (Ph.D.)--Stanford University, 2016.
- © 2016 by Yizhou Xiao
- This work is licensed under a Creative Commons Attribution Non Commercial 3.0 Unported license (CC BY-NC).
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