<p>The three essays in this dissertation explore the role of fluctuations in aggregate volatility and global temperature as sources of systemic risk. </p><p>The first essay proposes a production-based asset pricing model and provides empirical evidence suggesting that compensation for volatility risk is closely related to an unexplored characteristic of a firm, namely, its reliance on skilled labor. I propose a model in which aggregate growth has time-varying volatility, and linear adjustment costs in labor increase with the skill of a worker. The model predicts that expected returns increase with a firm's reliance on skilled labor, as well as compensation for fluctuations in aggregate uncertainty. Consequently, a rise in aggregate uncertainty predicts an increase in expected returns as well as in cautiousness in hiring and firing. This impact is larger for firms with a high share of skilled workers because their labor is more costly to adjust. I empirically test the implications of the model using occupational estimates to construct a measure of a firm's reliance on skilled labor, and find a positive and statistically significant cross-sectional relation between the reliance on skilled labor and expected returns. Empirical estimates also show that an increase in aggregate uncertainty leads to a rise in expected returns, and this impact is larger for firms which rely heavily on skilled labor; thereby, a firm's exposure to aggregate volatility is positively related to its reliance on skilled labor.</p><p>In the second and third essay, co-authored with Ravi Bansal, we explore the impact of global temperature on financial markets and the macroeconomy. In tho second essay we explore if temperature is an aggregate risk factor that adversely affects economic growth. First, using data on global capital markets we find that the risk-exposure of these returns to temperature shocks, i.e., their temperature beta, is a highly significant variable in accounting for cross-sectional differences in expected returns. Second, using a panel of countries we show that GDP growth is negatively related to global temperature, suggesting that temperature can be a source of aggregate risk. To interpret the empirical evidence, we present a quantitative consumption-based long-run risks model that quantitatively accounts for the observed cross-sectional differences in temperature betas, the compensation for temperature risk, and the connection between aggregate growth and temperature risks. </p><p>The last essay proposes a general equilibrium model that simultaneously models the world economy and global climate to understand the impact of climate change on the economy. We use this model to evaluate the role of temperature in determining asset prices, and to compute utility-based welfare costs as well as dollar costs of insuring against temperature fluctuations. We find that the temperature related utility-costs are about 0.78% of consumption, and the total dollar costs of completely insuring against temperature variation are 2.46% of world GDP. If we allow for temperature-triggered natural disasters to impact growth, insuring against temperature variation raise to 5.47% of world GDP.</p> / Dissertation

This thesis is an effort to advance our knowledge and understanding of the role that labor plays in shaping corporate financial policies and how it is in turn affected by considerations related to firms' financing. I present three essays on the interaction between finance and labor. First, I provide two examples of how labor affects financial decisions, in which I investigate the impacts that commitment to employee welfare and reliance on skilled labor have on cash management policies. Next, I examine the effect of ownership structure on labor investment decisions as an example of how finance affects human capital. In the first essay, I examine the relation between employee welfare practices and corporate cash holdings. Consistent with the predictions of the stakeholder theory, I find firms that are strongly committed to employee welfare, measured by ratings on employee relations, to hold more cash. The effect of employee welfare standards on cash holdings is stronger for firms in human-capital-intensive, competitive, and low turnover industries in which employees are more important to their businesses. The findings highlight the importance of human capital and employee-friendly practices as an overlooked determinant of cash holdings and suggest that managers can use cash to signal their financial health to current and potential employees, thereby increasing their competitiveness in labor markets. The second essay examines whether a firm's dependence on skilled labor affects its cash holdings. Consistent with a precautionary motive to accumulate cash when higher labor adjustment costs slow a firm's labor demand reaction to cash flow shocks, I find robust evidence that companies with higher shares of skilled labor hold more cash. The effect of skilled labor on cash holdings is more pronounced for firms that are financially constrained, attach higher values to their human capital, operate in competitive product markets, and belong to industries characterized by high labor mobility. The findings suggest that labor heterogeneity, and in particular the skill level of workers is an important determinant of corporate cash policies. The results provide managers of firms, particularly those that are financially constrained, with insights on how to minimize their labor adjustment costs and reduce the risk of losing their valuable human capital. In my third essay, I examine whether the presence of long-term institutional investors, who typically have strong monitoring incentives, can help mitigate agency conflicts associated with firms' employment choices. I find that abnormal net hiring, measured as the absolute deviation from net hiring predicted by economic fundamentals, decreases in the presence of institutional investors with longer investment horizons. Firms dominated by long-term shareholders reduce both over-investment (over-hiring and under-firing) and under-investment in labor (under-hiring).The monitoring role of long-term investors is more pronounced for firms facing higher labor adjustment costs. These findings suggest that institutional investors play an important role in firm-level employment decisions.