Essays in Finance and Development

Abstract

This dissertation studies the impact of financial institutions and information frictions on economic growth, as well as the effect of local economic fluctuations on aggregate financial outcomes.

In the first chapter, co-authored with Chenzi Xu, we use a historical laboratory to show that banks impact real economic activity through the liabilities side of their balance sheet, where safer liabilities provide better monetary services. The United States National Banking Act of 1864 required the new "national banks" to fully back their bank note liabilities with federal bonds, thereby creating a new and stable currency, which reduced transactions costs and facilitated trade. Using the discontinuity in the capital requirement as an instrument for national bank entry, we find positive and sizable impact on trade-related activities and manufacturing output growth.

In the second chapter, I study how changes in local economic conditions impact the performance and investment decisions of firms given their spatial distribution of locations. I use a sample of 285 publicly traded retail, restaurant, hotel, and entertainment service chains from 1997 to 2016 to study the effect of quarterly state-level income growth on firms, exploring variation in the geographic location of stores. I find that firms with more stores in high-growth states have better financial performance, and higher predictable stock returns. In addition, firm expansion is positively associated with past state-level income growth, which leads to further small increase in profitability.

In the third chapter, co-authored with Arun Chandrasekhar and Benjamin Golub, we study how social stigma of seeking information can inhibit learning, which could in turn have profound implications for economic development where information access is scarce. We Consider a Seeker of uncertain ability who can learn about a task from an Advisor. When higher-ability Seekers need information less, a Seeker concerned about reputation may refrain from asking to avoid signaling low ability. Separately, low-ability individuals may feel inhibited even if their ability is known and there is nothing to signal, an effect we term shame. Signaling and shame constitute an overall stigma of seeking information. We distinguish between the constituent parts of stigma in a simple model and then perform an experiment with treatments designed to detect both effects. We find signaling to be the dominant force overall. The shame effect is particularly pronounced among socially close pairs (in terms of network distance and caste co-membership) whereas signaling concerns dominate for more distant pairs.