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Capital misallocation: Cyclicality and sources

M. Jahangir Alam ()

Journal of Economic Dynamics and Control, 2020, vol. 112, issue C

Abstract: Capital misallocation can lower aggregate total factor productivity, but much less is known about its cyclicality. Using European firm-level data for 2005 to 2014, I establish that capital misallocation, as measured by the dispersion of returns to capital, is higher during recessions and lower during booms. This result is robust to using a much longer dataset from Compustat for the United States and Canada. I also find that firms’ net worth, measured as the difference between total assets and liabilities, relative to sales, can explain more capital misallocation than all the other examined firm-level factors combined. Furthermore, my results suggest that firms’ net worth explains approximately 10 percent of capital misallocation and 30 percent of its cyclicality.

Keywords: Misallocation; Decomposition; Countercyclical; Net worth; Productivity (search for similar items in EconPapers)
JEL-codes: E32 O11 O47 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jedc.2020.103831

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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Handle: RePEc:eee:dyncon:v:112:y:2020:i:c:s0165188920300014