Essays in macroeconomics and finance

This dissertation includes four essays in macroeconomics and finance, broadly covering the theme of firm behavior under uncertainty. The first chapter is co-authored with David Altig, Nicholas Bloom, Steven J. Davis, Brent Meyer, and Nicholas Parker, and documents the development of a new Survey of Business Uncertainty that elicits five-point discrete subjective probability distributions from US firm managers on a monthly basis. We construct measures of firm-level expectations and uncertainty based these subjective probability distributions and validate these measures against realized outcomes in our data as well as against macroeconomic series that capture first- and second-moment developments in the US Economy. In the second chapter I use data from the Survey of Business Uncertainty to study how biases in managerial beliefs affect firm performance and the macro-economy. I establish three facts: (1) Managers are neither over-optimistic not pessimistic: their forecasts for future sales growth are correct on average. (2) Managers are overconfident: they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic or pessimistic depending on whether the firm is growing or shrinking at the time of the forecast. I quantify the micro and macro implications of these facts by building and estimating a general equilibrium model in which managers of heterogeneous firms may have biased beliefs and make dynamic hiring decisions subject to adjustment costs. Biased managers in the model overreact to changes in their firm's profitability, destroying about 1.9 percent or firm value at the micro level, and reducing welfare by 1 percent relative to an economy with rational managers. In the third chapter---co-authored with Nicholas Bloom and Ian J. Wright---we argue that uncertainty appears to have both a short-run and a long-run component, which we measure using firm and macro implied volatility data from equity options of 30 days to 5 years duration. We ask what may be driving uncertainty over these different time horizons, finding that policy uncertainty, interest rate volatility, and currency volatility are particularly associated with long-run uncertainty, while oil price volatility and CEO turnover appear to impact short- and long-run uncertainty about equally. Examining a panel of over 4,000 firms from 1996 to 2016 we find that investment is relatively more sensitive to long-run uncertainty than hiring, and about as sensitive to long-run uncertainty as R& D. Investment is also more sensitive to the overall level of uncertainty than both R& D and hiring, holding fixed the relative magnitude of short- versus long-run uncertainty. We investigate the channels underlying these different sensitivies to short- versus long-run uncertainty, and show empirically and in simulations that lower depreciation rates and higher adjustment costs explain why investment is more sensitive to longer-run uncertainty. In the fourth chapter, I use data on all publicly traded firms in the United States to document the evolving differences between large and small firms over the period covering 1960 to 2015. Focusing separately on the financial and non-financial sectors, I document patterns related to the number of active publicly-traded firms; size differences between the firms at the 10th and 90th percentiles; the share of sales and assets held by firms at the top of the distribution; the behavior of entrants; volatility differences among small and large firms; the significance of the technology sector; and the sectoral affiliation of publicly-traded firms.

Keywords: Economics.
Advisor: Bloom Nick
Klenow Peter J. 
Piazzesi Monika