Essays on industry investment and financial markets
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This dissertation investigates asymmetries of financing patterns, depending on group characteristics - firm size or riskiness, which have shown in the empirical literature. The dissertation consists of two essays. This first essay, Financial innovation, Firm size and Growth, proposes a model of Schumpeterian growth endogeneizing the disproportionate impact of financial innovation on small firm sectors. Entrepreneurial skill on a continuum of types is private information. Hence, the severity of adverse selection problems between investors and entrepreneurs varies based on firm size. In the absence of financial innovation, the arrival of a new technology frontier renders existing screening technology obsolete, thereby making it more challenging for an investor to design a truth-telling mechanism, particularly with small firm (and size-dispersed) sectors. Thus, successful financial innovation is more pronounced in such sectors. The link between financial innovation and the small firm (and size-dispersed) sectors is weak in financially developing countries. I test my model prediction by using cross-country and cross-sector data at the European industry level. This result is consistent with my prediction. The second essay, Firm risks, Capital allocation frictions and the Business cycles, attempts to address new findings in business cycles: the cross-sectional standard deviation of firm level investment rate (investment dispersion) is at most acyclical or procyclical. This differs from the dispersion of productivity, output, and interest rates, which is countercyclical. I develop a dynamic stochastic general equilibrium model of physical capital matching frictions between heterogeneous firms and investors. In the mode, economic fluctuations are caused mainly by shocks to heterogeneity in firms' risks. One main feature is that investors search firms with priority given to loans to safe firms. Because safe firms are most likely to benefit from capital accumulation, this setting drives asymmetric patterns of firm-level business cycles - output, investment rate, and interest rates in a unified framework. In essence, the uncertainty in heterogeneous risks across firms generates the pro- or a-cyclical behavior of investment dispersions which is the data demonstrates.