Firms and investors often operate in environments with market imperfections and agency frictions. It is common wisdom that the effects of these microeconomic frictions are amplifed or mitigated by the quality of economic institutions in a country. Yet little is known about the precise channels through which institutions influence macroeconomic outcomes. The first chapter of this dissertation documents a novel stylized fact: countries with weaker institutions hold fewer foreign assets. It then highlights a new mechanism, the hedging of labor income risk in the presence of agency problems, by which weak institutional quality affects the compositionof country asset portfolios. The second chapter looks at FDI in the form of mergersand acquisitions (MA) during the Asian Financial Crisis of 1997-98. We find evidence that crisis-time MA between foreign acquiring firms and domestic targets were of lower longevity in crisis-affected countries. Using a simple model of matching between acquiring and target firms, we then argue that this was due to reducedmatch quality during the crisis. The third chapter establishes a set of stylized factsabout the relationship between institutional quality, macroeconomic volatility, firmsize distribution, and financial development in a large cross-section of countries.
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