Risk-adjusted capital allocation and misallocation

Joel David, Lukas Schmid and David Zeke

Journal of Financial Economics, 2022, vol. 145, issue 3, 684-705

Abstract: We develop a theory linking “misallocation,” i.e., dispersion in marginal products of capital (MPK), to macroeconomic risk. Dispersion in MPK depends on (i) heterogeneity in firm-level risk and (ii) the magnitude of risk premia. Stock market-based measures imply that risk considerations explain about 25% of MPK dispersion among US firms and rationalize a large persistent component in firm-level MPK, consistent with the micro-level data. Time-varying risk premia lead to countercyclical MPK dispersion alongside procyclical capital reallocation. Risk-based MPK dispersion in part shapes the dynamic behavior of aggregate productivity, namely, its long-run level, volatility and skewness.

Keywords: Misallocation; Capital reallocation; Aggregate TFP; Risk premia; Cross-section of stock returns; Costs of business cycles (search for similar items in EconPapers)
JEL-codes: D24 D25 E22 E32 G12 O47 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Risk-Adjusted Capital Allocation and Misallocation (2020)
Working Paper: Risk-Adjusted Capital Allocation and Misallocation (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:3:p:684-705

DOI: 10.1016/j.jfineco.2022.06.001

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