Essays on Financial Frictions and Aggregate Dynamics

This dissertation studies the effects of firm debt and financing frictions on the macroeconomy. Chapter 1 investigates the role of changes in firms' idiosyncratic risk and their cost of default in driving changes in employment and credit spreads, both over the business cycle and in the cross-section. I use firm-level panel data and a structural model of financial frictions and volatility shocks to assess the effects of shocks to firm volatility and default costs. I find that volatility shocks alone can only generate modest declines in aggregate employment. However, simultaneous shocks to firm volatility and default costs can interact to generate large employment declines. Chapter 2, co-authored with Robert Kurtzman, investigates the role of changes in the allocation of labor and capital between firms in driving productivity dynamics. This chapter presents accounting decompositions of changes in aggregate labor and capital productivity. Our simplest decomposition breaks changes in an aggregate productivity ratio into two components: A mean component, which captures common changes to firm factor productivity ratios, and a dispersion component, which captures changes in the variance and higher order moments of their distribution. We demonstrate that in standard models of production with heterogeneous firms, our dispersion component reflects changes in distortions to the allocation of labor and capital between firms. We find, for public firms in the United States and Japan, that the dispersion component plays a minor role in productivity changes over the business cycle.Chapter 3, co-authored with Robert Kurtzman, investigates the role of debt overhang, an agency problem between firms' equity holders and creditors, in distorting firm growth and aggregate welfare. This chapter addresses this question through the lens of a general equilibrium model of firm dynamics and endogenous innovation in which debt overhang affects the firm innovation decision and subsequent firm growth. The estimated model implies that while the private gains to a firm from resolving debt overhang can be large if it faces sufficient default risk, the social gains to long-run productivity and output are relatively modest. The time-varying distribution of firm default risk suggests social gains may be greater during recessions