This thesis consists of two essays analyzing the effect of uncertainty in macroeconomic
and financial settings.
Inspired by the counter-cyclical pattern of uncertainty and the role played by
capital reallocation in Total Factor Productivity, we propose a theoretical viewpoint
on uncertainty-driven business cycles in the first essay. Relying on the interaction
between financial market and real sector, we are able to build up a transmission
mechanism from uncertainty to business cycle by introducing a financial contract
between firms and financial intermediaries. By setting up two types of firm with different
production technology in a general equilibrium model, we show that information
asymmetry leads firms with financing needs to be financially constrained. Due
to information asymmetry, first best case is unachievable and production resources
are allocated more to firms without financing needs. When uncertainty changes, the
lending decision of financial intermediary also changes, further affecting firms’ production
capacities. Production resources are reallocated between the two types of
firms which generates fluctuations in TFP and other aggregates. More importantly,
firms with financing needs is assumed with better production technology than the
one adopted by the other type on average. Increase in uncertainty worsens the informational
problem, reduces funds provided to firms with better technology, causes
reallocation of resources to the other type, and further decreases productivity of the
economy as a whole. This is in line with an economic downturn and also consistent
with the counter-cyclicality of uncertainty. We also conduct a quantitative analysis
by calibrating the model to the data and the estimated results provide corroborating
evidence for the theory.
Using a merged data-set of US firms during years 1971-2008, we empirically
examine the impact of uncertainty on capital reallocation via financial friction in
the second essay. By adopting KZ index as an indicator for firms’ financial statuses,
we decompose the uncertainty-capital reallocation relation into three hypotheses.
Using cross-sectional dispersion of stock return as a measure for uncertainty, we
find that uncertainty is negatively associated with firms’ financial statuses. A firm
with high uncertainty level is more likely to be in a low position of financial status.
Second, uncertainty is in a negative relation with capital reallocation, which means
capital reallocation decreases at firm level when uncertainty increases. Third, by
sorting firms into different groups based on their financial statuses, we find that
firms which are in worse financial situation are more responsive to uncertainty
change. The finding is consistent with our prediction that uncertainty affects capital
reallocation through financial friction. We employ both reduced-form and structural
estimation strategies to examine our predictions, and all regression results are
supportive. To further test the role of financial friction in the relation, we also sort
firms into different groups by SIC code. And we find that, firms in industries relying
more on financial market for external financing are more responsive to uncertainty
change. / published_or_final_version / Economics and Finance / Doctoral / Doctor of Philosophy
| Identifer | oai:union.ndltd.org:HKU/oai:hub.hku.hk:10722/167214 |
| Date | January 2012 |
| Creators | Yang, Qin, 杨琴 |
| Contributors | Suen, WC |
| Publisher | The University of Hong Kong (Pokfulam, Hong Kong) |
| Source Sets | Hong Kong University Theses |
| Language | English |
| Detected Language | English |
| Type | PG_Thesis |
| Source | http://hub.hku.hk/bib/B48199382 |
| Rights | The author retains all proprietary rights, (such as patent rights) and the right to use in future works., Creative Commons: Attribution 3.0 Hong Kong License |
| Relation | HKU Theses Online (HKUTO) |
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