The last three decades have seen rapid growth in the number and variety of securities issued. This paper quantifies innovation in securities, finding that increased variety through specialized new financial products improves firm’s ability to raise funds. We develop a model of the allocation of financial products among firms in specific sectors, and estimate that the differential adoption of new financial products, particularly those that are specialized to the financing needs of specific firms, explains most of the observed variation in the amounts of funds raised.
Debt maturity, term premium and the entrepreneurial choice of risk
Job Market Paper [draft coming soon]
I study the interaction between the optimal choice of risk and debt maturity by financially constrained firms. Such interaction has the potential to play an important role in explaining the observed heterogeneity in risk and debt maturity. To obtain a joint theory of debt maturity and project selection, I build a model in which the optimal maturity is defined by a trade-off between the relatively higher rollover risk associated with short-term debt and the relatively higher risk-taking incentives associated with long-term debt. Risk neutral creditors penalize firms that can later on increase their risk more easily and therefore have higher default probability. This in turn induces firms to select into projects with lower opportunities to change risk. Policies or external shocks affecting the term structure of interest rates can have a distinct impact on these choices, changing the incentives to undertake risky projects. Using firm-level data on allocation of resources to business segments I document evidence consistent with the relation between debt maturity and the selection of risky projects.
Firm Growth, Finance and Development
with Francisco Buera and Francesca Crucitti [draft coming soon]
How important are financial markets for economic development? What are the channels through which frictions in credit market affect aggregate productivity? A recent literature stresses the role of the persistence of the exogenous process of firm's productivity in determining the answer to these questions. If the productivity process is very persistent, then self-finance is a good substitute of external finance. Instead, we highlight the role of growth processes exhibiting a skewed distribution of firm growth, specially among young firms, a key feature of the data in developed countries. Using an otherwise standard model of entrepreneurship with financial frictions and a rich stochastic process for productivity, we find significant TFP losses due to capital misallocation in economies with underdeveloped financial markets. In addition, the model with a richer productivity process is able to account for the observed differences in the life-cycle of firms across countries.