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Empirical Analyses in Finance and Macroeconomics

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Empirical Analyses in Finance and Macroeconomics Empirical Analyses in Finance and Macroeconomics The Harvard community has made this article openly available. Please share how this access benefits you. Your story matters Citable link http://nrs.harvard.edu/urn-3:HUL.InstRepos:40050093 Terms of Use This article was downloaded from Harvard University’s DASH repository, and is made available under the terms and conditions applicable to Other Posted Material, as set forth at http:// nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of- use#LAA Empirical Analyses in Finance and Macroeconomics A dissertation presented by Yueran Ma to The Department of Economics in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the subject of Business Economics Harvard University Cambridge, Massachusetts April 2018 c 2018 Yueran Ma All rights reserved. Dissertation Advisors: Author: Professor Andrei Shleifer Yueran Ma Professor Edward Glaeser Empirical Analyses in Finance and Macroeconomics Abstract This thesis has three essays which are empirical studies at the intersection of finance and macroeconomics. The topics include low interest rates and financial markets, debt contracts and corporate borrowing constraints, and expectations in finance and macro. The essays hope to provide empirical evidence, using diverse approaches, to better understand the connections as well as differences between classic theories and economic activities in practice. iii Contents Abstract . iii Acknowledgments . xii Introduction 1 1 Low Interest Rates and Risk Taking: Evidence from Individual Investment Deci- sions 3 1.1 Introduction . .3 1.2 Benchmark Experiment . .8 1.2.1 Experiment Design and Sample Description . .9 1.2.2 Results . 16 1.3 Potential Mechanisms . 21 1.3.1 Conventional Portfolio Choice Theory . 21 1.3.2 Reference Dependence . 24 1.3.3 Salience and Proportional Thinking . 27 1.4 Testing Mechanisms . 29 1.4.1 Experiment T1 (Non-Linearity) . 30 1.4.2 Experiment T2 (History Dependence) . 33 1.4.3 Experiment T3 (Salience and Proportional Thinking) . 38 1.5 Suggestive Evidence from Observational Data . 41 1.6 Conclusion . 48 2 Anatomy of Corporate Borrowing Constraints 49 2.1 Introduction . 49 2.2 Corporate Borrowing in the US . 57 2.2.1 Fact 1: Prevalence of Cash Flow-Based Lending . 58 2.2.2 Fact 2: Prevalence of Earnings-Based Borrowing Constraints . 63 2.2.3 Heterogeneity in Corporate Borrowing . 70 2.2.4 Implications . 74 2.3 Cash Flows, Corporate Borrowing, and Investment . 74 2.3.1 Mechanisms . 75 iv 2.3.2 Baseline Test . 78 2.3.3 Exogenous Variations in Operating Earnings: An Accounting Natural Experiment . 90 2.3.4 Additional Discussion . 93 2.4 Property Prices, Firm Outcomes, and Financial Acceleration . 99 2.4.1 Property Value and Corporate Borrowing . 100 2.4.2 The Great Recession: Unpacking the Property Price Effect . 108 2.4.3 Property Price Declines and the Firm Collateral Channel: US and Japan111 2.4.4 Earnings Drop and Firm Outcomes in the Great Recession . 112 2.4.5 Financial Acceleration in General Equilibrium: A Simple Comparison 113 2.5 Conclusion . 115 3 New Experimental Evidence on Expectations Formation 116 3.1 Introduction . 116 3.2 Related literature . 119 3.3 Expectations: Extrapolative vs. sticky . 121 3.4 Experiment Design . 123 3.4.1 Experimental conditions . 123 3.4.2 Payments . 129 3.4.3 Descriptive Statistics . 130 3.5 Empirical Results . 131 3.5.1 Measuring rational expectations . 131 3.5.2 Main Result . 132 3.5.3 Robustness of the estimates to g and l .................. 134 3.5.4 Quantifying the results . 136 3.5.5 Heterogeneity . 139 3.5.6 Individual-level vs Consensus Forecast . 140 3.5.7 Robustness to Experimental Setting . 142 3.6 Conclusion . 151 References 152 Appendix A Appendix to Chapter 1 168 A.1 Proofs . 168 A.1.1 Proof of Proposition 1 . 168 A.1.2 Proof of Proposition 2 . 169 A.1.3 Proof of Corollary 1 . 171 A.1.4 Proof of Proposition 3 . 171 A.1.5 Influence of Gross Framing . 171 v A.2 Additional Discussions . 172 A.2.1 Dynamic Portfolio Choice . 172 A.2.2 Diminishing Sensitivity . 173 A.2.3 Reference Point in Expected Returns . 180 A.2.4 Reference Point Formation . 182 A.2.5 Additional Experiments on History Dependence . 185 A.2.6 Salience and Related Models . 187 A.2.7 Inflation . 190 A.3 Additional Tables and Figures . 195 A.3.1 Additional Experimental Results . 195 A.3.2 Dutch Replication . 203 A.3.3 Additional Results in Observational Data . 206 A.4 Data . 216 A.4.1 List of Experiments . 216 A.4.2 Sources and Variable Definitions for Observational Data . 217 Appendix B Appendix to Chapter 2 218 B.1 Asset-Based Lending and Cash Flow-Based Lending . 218 B.1.1 Aggregate Composition . 222 B.1.2 Firm-Level Composition . 224 B.2 Earnings-Based Borrowing Constraints . 229 B.2.1 Specifications of Earnings-Based Covenant . 229 B.2.2 Other Earnings-Based Constraints . 230 B.3 Classic Models of Corporate Borrowing . 230 B.4 Accounting . 234 B.4.1 EBITDA and OCF . 234 B.4.2 Earnings Management . 241 B.5 Estimates of Market Value of Firm Real Estate . 241 B.5.1 Method 1: Traditional Estimates . 241 B.5.2 Method 2: Property Information from Firm 10-K Filings . 243 B.6 Borrowing Constraints and Financial Acceleration . 245 B.6.1 Set-Up . 245 B.6.2 Collateral-Based Constraints . 248 B.6.3 Earnings-Based Constraints . 251 B.6.4 Financial Acceleration: A Comparison . 254 B.7 Proofs . 256 vi Appendix C Appendix to Chapter 3 260 C.1 Additional tests . 260 C.1.1 Formulation with lags . 260 C.1.2 An alternative model: Adaptive expectations . 261 C.1.3 Estimate robustness across Realizations of the process . 263 C.2 Appendix Figures . 264 C.3 Survey Appendix . 265 C.3.1 Sample Experiment . 265 C.3.2 Variants . 272 vii List of Tables 1.1 Demographics of Benchmark Experiment Samples . 14 1.2 Low Interest Rates and Risk Taking: Benchmark Experiment Results . 19 1.3 Allocations in Various Interest Rate Conditions . 31 1.4 Path Dependence of Investment Decisions . 35 1.5 Baseline and Gross Framing . 40 1.6 Summary Statistics of Observational Data . 44 1.7 Interest Rates and AAII Portfolio Allocations . 46 1.8 Interest Rates and Household Investment Flows . 47 2.1 Composition of Corporate Borrowing . 63 2.2 Summary Statistics of US Non-Financial Firms . 85 2.3 Debt Issuance and Investment Activities: Large Firms w/ EBCs . 86 2.4 Debt Issuance and Investment Activities: Firms w/ Low Prevalence of EBCs 87 2.5 Changes in EBITDA: Accounting Natural Experiment . 93 2.6 Debt Issuance and Investment Activities: Large vs..
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