Capital misallocation and financial market frictions: Empirical evidence from equity cost of capital

Junyan Shen

International Review of Economics & Finance, 2023, vol. 87, issue C, 486-504

Abstract: This paper quantifies the impact of capital misallocation on the loss in total factor productivity (TFP), arising from financial frictions. A two-period model is built to map the dispersion in the cross-sectional borrowing costs into the TFP loss. Equity cost of capital, which closely relates to the expected profitability, is the main measure of borrowing costs. For the manufacturing sector in U.S., such productivity loss ranges from 3.7 to 9.5 percent. The TFP loss is stronger when credit is tightening and among firms with larger financial constraints. I also explain why Hsieh and Klenow (2009) may overstate the impact of capital misallocation.

Keywords: Misallocation; Aggregate TFP; Financial frictions; Cost of capital (search for similar items in EconPapers)
JEL-codes: D24 D25 E22 E32 O47 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:87:y:2023:i:c:p:486-504

DOI: 10.1016/j.iref.2023.04.012

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