Essays On Debt Financing And Financial Distress

Author : Junkan Li
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (135 download)

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Download or read book Essays on Investment, Maintenance, and Repair written by Junkan Li and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation contains three chapters bringing together my work in investment, maintenance, and repair. In the three chapters, I construct a market-oriented M&R model to match the stylized facts of the M&R markets in the real world and use it to explore the significance of M&R in the aggregate economy. I present the techniques and difficulties in incorporating the M&R model into a macro-finance framework with endogenous debt default and develop a feasible algorithm to solve the macro-M&R model with non-convexity and multiple equilibria. In the first chapter, titled "Maintenance and Repair: A Parsimonious Model," I modeled the production and trading of maintenance and repair (M&R) in the after-market of capital and developed a generalized model to match the stylized facts documented in the micro studies and survey. In almost all previous studies, the M&R produced by the third parties M&R companies and the capital producers are assumed to be homogeneous. However, I revise this assumption and utilize a CES function to describe the complementarity among the M&R goods made by different producers. Such settings allow me to model the locked-in effect in the M&R market and keep the structure of the M&R market more consistent with the real world. Given the M&R model, I then propose a novel calibration strategy so that the cyclicality and the volatility of the aggregate M&R expenditures sequence generated by the model match the correspondent statistics in the data. In the second chapter, titled "Quantifying the Indirect Cost of Financial Distress," I study the interactions between the firm's financial condition and the demand for the goods it produces, focusing on the physical capital manufacturers in Canada. The interactions are constructed through the capital's maintenance and repair (M&R), which is also supplied by capital manufacturers and is necessary to keep the used capital operative. When the possible bankruptcy of a financially distressed manufacturer makes the existence of the M&R in the future uncertain, rational buyers devalue the capital and reduce their demand. This downward shift in the demand curve generates an indirect cost of financial distress, lowering revenues and profits in the goods market and making the manufacturers further distressed. To quantify the indirect cost, I construct a novel model of capital market with a secondary M&R market, using a dynamic game framework, and incorporate it into a stochastic dynamic partial equilibrium model with heterogeneous capital manufacturers who also make decisions on debt financing and default. The calibrated results indicate the real effects of the risky M&R are phenomenal: in the long run, the aggregate investment, consumption production, and hours worked all decrease by 10%, and the default rate increases by 15%. Extra experiments on M&R technology are conducted, ensuring the significance of M&R both in the long run and over the business cycles. In the third chapter, titled "An Approximate Solutions to a Class of Rational Expectation Models," I studied a class of rational expectation models, a more general version of the model in the second chapter. I proposed a refinement strategy and proved the existence of the "almost" rational solutions that lead to continuous and differentiable value functions. I also proposed a feasible algorithm based on the grid search method to solve the refined solution numerically. Some discussion is provided in the end about the extension of the baseline model and algorithm to solve the problem with multi-dimension state space and the possibility of introducing other derivative-based methods to solve the rational expectation models.