Essays on macroeconomics and firm financing

This thesis consists of three chapters on firm financing and how issues related to firm financing may impact on the macroeconomy. In the second chapter, the role of collateral in debt contracts is explored within an environment where banks also face regulatory solvency constraints. I model a credit market with imperfect information and aggregate uncertainty. Here collateral plays a dual role. First, it can help mitigate the adverse selection problem by acting as a screening device. Second it also helps the bank satisfy any regulatory constraint by reducing the loss given default that the bank suffers in bad aggregate states. As the regulatory constraint becomes more strict, collateral may become less effective as a screening device, highlighted by the possibility of pooling equilibria existing. The third chapter builds a model of SME loan applications that is consistent with existing survey data. Specifically, it captures several observable features of the loan market. By explicitly modelling the loan application phase, I am able to justify why firms apply for loans and are still subsequently rejected. This chapter also provides a theoretical contribution in that there is the possibility, in a model without asymmetric information, of 'pure credit rationing' where observationally equivalent firms are granted a loan with while others are not. The fourth chapter, investigates how creditor and debtor rights in the case of firm insolvency impact on the equilibrium outcomes in a firm dynamics model. Two insolvency regimes are compared, a creditor-friendly regime such as the UK and a debtor-friendly regime such as the US. Debtor-friendly regimes are shown to be more costly in the steady-state, leading to larger spreads on firm debt. The model dynamics find a response to productivity shocks that are largely consistent with the UK and the US following the financial crisis