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My thesis focuses on the role of disclosure for debt capital markets. In Chapter 1, I explore the commercial paper (CP) market, the largest source of public short-term borrowings for US non-financial firms, to examine whether firms use short-term debt to manage reported leverage ratios. I document that firms structure CP to mature immediately prior to a fiscal quarter-end. These maturities result in a 7% (2 pp) decline in leverage ratios at quarterends, relative to average within-quarter levels. I believe this is an important topic, as it brings new insights to CP issuing firms, credit rating agencies and the US Securities and Exchange Commission. Chapter 2, a joint work with Aytekin Ertan, Emmanuel De George and Florin Vasvari, investigates the extent to which fair value adjustments (FVAs) arising from business combinations provide information about available collateral. We show that FVAs, especially those reported on the target?s tangible assets, are associated with substantial new debt issuance at more favorable lending terms by the combined firm after the acquisition. In Chapter 3, I examine the disclosures of large equity short positions in the European Union, and provide evidence that bond market reactions to negative earnings surprises are attenuated after a short sales position is disclosed, especially when the discloser is a reputable short seller.

This thesis is structured around two main chapters that study how financial intermediaries affect asset prices and real economic activity of firms. In the first chapter, I study how mutual fund managers affect asset prices due to two types of risk they have to face: fund flow risk and liquidity risk. Uncertain fund flows affect managers' income and may force managers to liquidate their asset holdings even when the liquidating cost is high. I present an equilibrium model with fund flow risk and liquidity risk, with two types of investors: delegated managers and direct investors. The model implies that expected returns are driven by two factors: market beta adjusted for liquidity and fund flow beta. The fund flow beta measures how a stocks returns and liquidating costs co-move with unexpected aggregate fund flows. I empirically test the model and find that the implied stochastic discount factor explains the average returns of 50 size, book-to-market, liquidity, and flow beta portfolios jointly and separately. In fact, the fund flow beta subsumes the liquidity-adjusted market beta across different model specifications. Moreover, the magnitude of the price of risk for fund flow beta is very similar across the different sets of test assets, supporting the prediction that aggregate innovations in fund flows are an important component of the stochastic discount factor. Conditional on liquidity risk, the fund flow risk premium is 3.17% for illiquid stocks and 1.74% for liquid stocks annually. The second chapter studies how the supply of foreign bank loans affects debt financing and subsequently the real investment and employment of non-financial firms in 70 different countries using bank-firm level data. I exploit the Lehman Brothers bankruptcy as a shock to a bank's health during the 2008 financial crisis, measured by the change in the number of loans made by the bank to all firms during the crisis relative to the pre-crisis period. I instrument the bank's health using the pre-crisis share of the revolving facilities co-syndicated with Lehman Brothers. Using the instrument, I find that firms with a high share of foreign bank loans do not decrease debt financing, real investment, and employment as much as firms with a low share of foreign bank loans during the negative foreign loan supply. This points to a mechanism in which firms with a high foreign loan share substitute to local loan or bond financing at the expense of firms with a low foreign loan share which are crowded out from the local debt market.

This study examines whether foreign firms raise debt capital more often and at lower rates after cross listing their equity shares in the U.S., and the sources of these debt market benefits. Employing a large global sample from more than 40 countries, we find that firms raise debt capital more frequently in the bond market and issue fewer syndicated loans following an equity cross-listing on a U.S. exchange. Offering yields of bonds are significantly lower after the cross-listing, while syndicated loan spreads do not change. We also find that cross-listed firms are more likely to conduct public bond offerings, at lower rates, instead of placing their bonds privately. Moreover, cross-listed firms domiciled in countries with a relatively weak regulatory and reporting environments issue bonds more frequently outside the U.S., while those located in countries that protect lenders well, issue more Yankee bonds, again at a lower cost. These results support the notion that bonding, information disclosure, and liquidity benefits from U.S. equity cross-listings extend to the debt holders of the firm.

Using a new narrative measure of fiscal policy shocks for the U.K., we show that households with mortgage debt exhibit large and significant consumption responses to tax changes. Homeowners without a mortgage, in contrast, do not adjust their expenditure, with responses not statistically different from zero at all horizons. We compare our findings to the predictions of traditional and newer theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the macroeconomy.

Since at least Coase (1937) much (if not most) of financial economics research is devoted to assessing how the presence of externalities and frictions aects the decision-making process of corporate managers and capital-market participants. The main objective of the present thesis is to understand how certain frictions (such as the tax advantage to debt, the costs of bankruptcy and debt issuance, and overconfidence of capital-market investors) affect an agent's actions and whether these eects can contribute to explaining the stylized facts about corporate finance and capital markets. Chapters 1 and 2 of this thesis contribute to the literature on the choice of a firm's capital structure. Chapter 1 marries two strands of the corporate finance literature: the research that studies how a firm dynamically adjusts its debt level and the literature that investigates the firm's optimal mix of bank and public debt. This chapter proposes a framework of dynamic capital structure in the presence of both bank and market debt. The model demonstrates that, under tougher bankruptcy regimes, a firm finds it beneficial to issue more bank debt at each refinancing point and to restructure less frequently. Higher bank debt capacity also makes the firm more valuable, which increases its incentives to avert bankruptcy. The model therefore predicts that, in countries with tougher bankruptcy regimes, firms restructure less frequently, add more bank debt at each restructuring, and have a lower likelihood of default. When a firm has an option to adjust its future debt levels, the optimal leverage ratios and the optimal debt structure are more in line with what is observed empirically. Chapter 2 investigates whether a dynamic capital structure model can explain the cross-sectional size-leverage relationship. The driving force considered is the presence of fixed costs of external financing that lead to infrequent restructuring and create a wedge between small and large firms. The model shows that the firm size has four eects on leverage. Small firms choose higher leverage at the moment of refinancing to compensate for less frequent rebalancings. The longer waiting times between refinancings lead to lower levels of leverage at the end of restructuring periods. Within a refinancing cycle, the intertemporal relation between leverage and firm size is negative. Finally, there is a mass of firms opting for no leverage. The analysis of a dynamic economy demonstrates that in the cross-section the relation between leverage and size is positive, and thus, fixed costs of financing contribute to the explanation of the stylized size-leverage relation. However, the relationship changes sign when we control for the presence of unlevered firms. Chapter 3 studies the eect of the excess volatility on the trading strategies of capital-market participants. It proposes a general-equilibrium model of sentiment with two classes of agents and stock prices being excessively volatile because one class is overconfident about a public signal. The trading strategy of the rational investors is determined and analyzed. Because overconfident traders introduce an additional source of risk, rational investors are deterred by their presence and reduce the proportion of wealth invested into equity except when they are extremely optimistic about future growth. Moreover, their optimal portfolio strategy is based not just on a current price divergence but also on their expectation of future sentiment behaviour and a prediction concerning the speed of convergence of prices. Thus, the portfolio strategy includes a protection in case there is a deviation from that prediction. Long maturity bonds are found to be an essential accompaniment of equity investment, as they serve to hedge this "sentiment risk".