Roots and Consequences of Financial Distortions

Abstract

This thesis links the roots and the consequences excess debt can have for an economy. Chapter 2 studies the impact financial frictions, caused by high debt levels, have on the business cycle. This helps understanding what the consequences of high debt levels are and how they translate to the real economy through business cycle fluctuations. The third chapter stands out as it does not study financial distortions directly but financial intermediation. Nevertheless, it is an important component in the debt and distortions nexus as an enormous share of external finance used by companies is provided by banks. Furthermore, the study sheds light on the question how the banking system is affected by measures introduced in the aftermath of the recent financial crisis, which was caused by financial distortions in the first place. The fourth and last chapter tries to uncover the roots of indebtedness of firms and studies the external finance preferences of European companies. They rely less, in comparison to their American counterparts, on external equity financing and the goal of this chapter is to analyze whether this is rooted in their preferences.