This dissertation focuses the corporate behaviors in a dynamic world with uncertainty. Especially, I am interested in how firms tradeoff their investment and cash savings when external financing is costly. The first two chapters fit into this theme. One considers optimal investment and financing policies when uncertainty itself is time-varying, the second investigates how firms prepare themselves against devaluation risks. Both chapters build dynamic corporate theories and test them empirically. The third chapter steps back by asking why aggregate volatility is time-varying and why is it persistent in a dynamic general equilibrium with endogenous growth. I show that endogenous asset allocation between different assets can be the reason. In the first chapter I study how firms manage their cash savings, financing, and investment when aggregate uncertainty is time-varying. I develop and estimate a dynamic model featuring aggregate uncertainty shocks, costly external financing, investment irreversibility, and time-varying risk premia. In my model, firms have a precautionary-savings motive and real options to wait, both of which interact with time-varying uncertainty and are reinforced by state-dependent risk premia. My model confirms previous findings that firms save more in cash and invest less when aggregate uncertainty is high. In addition, I show that in the high uncertainty states, (1) firms with high profitability and low cash are more likely to delay equity issuance, (2) firms with low profitability and high cash are more likely to delay payout, and (3) aggregate equity issuance and payout are both lower. Finally, counterfactual experiments show that (1) a model without dynamic uncertainties cannot explain the observed firm behaviors in high uncertainty states, and (2) time-varying risk premia amplify the impact of the aggregate uncertainty shocks. In the second chapter, I investigate the relationship between investment and cash savings in a special setting: devaluation episodes in emerging markets. Devaluation events are typically anticipated by the economy but affect local firms in the tradable versus nontradable sectors differently. Tradable firms expect higher cash flows but nontradable firms expect lower ones, even their current cash flows are stable because of the currency-pegging. I build a model to show that, investment and cash savings are both complementarity, because of future prospects, and substitution because of limited current cash balance. Before devaluation, tradable firms invest more due to better expectation of the future but have to substitute for a lower cash savings tomorrow. Empirically, I use difference-in-difference approach and two devaluation episodes in Mexico and Argentina to test these predictions. I find strong evidence in Mexico that tradable firms invested more than nontradable firms and save less, as the devaluation was approaching. Evidence in Argentina is not strong. We discuss the potential remedies and future works to do. The final chapter explores asset allocation decisions and endogenous growth volatilities in an economy with endogenous growth. Firms have two produced inputs, capital and technology. When a representative firm optimally allocates the investment between the two inputs, both the consumption growth and its volatility are functions of the economy's technology-to-capital ratio. As a result, not only the long run consumption growth is volatile, but also its volatility is endogenously stochastic. Moreover, after a large negative or positive shock, the economy is away from its optimal allocation. This takes time for the economy to travel back to the optimal allocation because of the convex adjustment costs. As a result, both the consumption growth and its stochastic volatility are persistent. Finally, we discuss the asset pricing implication of the model and show that it microfounds Bansal and Yaron (2004) long-run risk model with time-varying volatilities.

Pricing practices of firms are an important yet little studied aspect of the price phenomenon in sociology. This study asks the question: Why do different firms, even in the same market, tend to use different pricing practices--value-informed, competition-informed, or cost-informed pricing--to set prices? To answer this question, this study builds a dynamic flocking model of pricing to investigate the inter-dynamics among pricing practices and various market uncertainties. The model shows that each pricing practice is only viable under certain combinations of levels of different market uncertainties. Supporting evidence, theoretical innovations, and practical implications of the model are discussed. Contrary to common intuition, uncertainty, conceptualized as some cognitive tolerance interval, is akin to lubricant, making the otherwise rigid, brittle, and friction-fraught system more smooth, robust, and error-tolerant under certain circumstances. Therefore, uncertainties, and the inter-dynamics among them, should be treated as an endogenous and integral part of the social mechanism at issue, rather than some amorphous “other” external to it.

This dissertation focuses on sequential games of imperfect information. I study settings in which not only do agents face imperfect information in the traditional sense of not possessing all payoff-relevant information, but they also face uncertainty about their position of movement in the sequence. I have utilized this framework to study financial investment decisions by individuals, production decisions by firms, and implications on information aggregation in observational learning. In order to study production decisions by firms I utilize a Stackelberg oligopoly model with a stochastic consumer demand. In this setting firms do not know their position of movement, and as a result of the stochastic demand they cannot infer from the prevailing price if another firm has yet entered the market. I find that as a result of uncertainty firms produce a higher quantity than they otherwise would have, resulting in a more competitive outcome. In fact, as the number of firms in the market increases, with positional uncertainty the equilibrium quantity actually exceeds the perfectly competitive quantity. I then investigate the impact of positional uncertainty when agents must choose levels of investment in a financial asset. Investors receive a signal about the value of the asset but are not necessarily aware of their position in the sequence of investors. As a result, they are unsure to what extent the signal they receive represents profit-relevant information, or if the signal is “stale” in the sense that the information has been incorporated into the price by other investors. This results in more cautious levels of investment, and an asset price that does not represent the true underlying value. To study the behavioral aspects of financial investment, I introduce in this model a notion of confidence. While much work in the area of behavioral finance has studied the role of confidence over the accuracy of information, my interest is in confidence over the timing of information. I define an agent as overconfident if they believe they are more likely to have received the signal earlier than other agents, and are thus more likely to be early investors. The effect of overconfidence can overwhelm the cautious nature of positionally uncertain investors, even potentially leading to an overreaction to information. This effect can explain overvaluation of assets and volatility of prices in response to information. In a model of observational learning, limited information about the history of actions slows the integration of information. However, I show that in the limit, even in the presence of limited histories complete learning occurs. In the environment of limited access to historical information I introduce uncertainty over position of action. This uncertainty even further dampens the process of learning from a welfare standpoint, but as the number of agents grows large complete learning still obtains in the limit for all levels of uncertainty. The common finding in all these settings is that uncertainty about the order of action causes agents to be cautious about exploiting profitable opportunities. In the case of oligopoly this leads to more competitive outcomes, whereas in the cases of investment and social learning uncertainty leads to less effective information aggregation.