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theses

This dissertation investigates the role that capital market imperfections play in shaping the behavior of firms along several dimensions: capital structure, investment policies, bankruptcy decisions and life-cycle dynamics. The dissertation puts together two separate but closely related papers, both of which are concerned with bankruptcy and firm financing under asymmetric information and limited enforcement. In Chapter 2, I present a model of firm finance that encompasses imperfect investor protection, risk aversion and costly state verification. Imperfect investor protection is introduced through the limited liability clause of the financial contract, and captures the maximum fraction of returns that the investor can seize from the entrepreneur. A positive lower bound on consumption then interacts with entrepreneurial risk aversion in non-trivial ways. I characterize optimal contracts and study the conditions under which standard debt is optimal. Under suitable assumptions about the structure of the problem, standard debt contracts (SDCs) are optimal if and only if investor protection is sufficiently low. On the other hand, low investor protection results in higher funding costs and bankruptcy probabilities. In my setting, this implies that when SDCs are optimal, lowering investor protection reduces the entrepreneur's welfare. Numerical examples show that moderate changes in investor protection can have large effects on the terms of the contract and on the entrepreneur's welfare. Finally, I study the role of leverage and consider the welfare consequences suboptimally implementing standard debt contracts. In Chapter 3 I study firm dynamics and industry equilibrium when firms under financial distress face a non-trivial choice between alternative bankruptcy procedures. Given limited commitment and asymmetric information, financial contracts specify default, renegotiation and reorganization policies. Default occurs in equilibrium and leads to either liquidation or renegotiation. Renegotiation entails a redistribution of social surplus, while reorganization takes the form of enhanced creditor monitoring. Firms with better contract histories are less likely to default, but, contingent on default, firms with better outside options successfully renegotiate, in line with the empirical evidence. Unless monitoring is too costly, renegotiation leads to reorganization, which resembles actual bankruptcy practice. I calibrate the model to match certain aspects of the data on bankruptcy and firm dynamics in the U.S. My counterfactual experiments show that, compared with an economy with liquidation only, the rehabilitation of firms (renegotiation and reorganization) has a sizable negative effect on exit rates and size dispersion, and positive effects on average size and productivity.

ETD_6341

Ph.D.

Includes bibliographical references

by Cesar E. Tamayo

doi:10.7282/T30V8FNN

ETD doctoral

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