Risk-Adjusted Capital Allocation and Misallocation
Joel David and
No 13205, CEPR Discussion Papers from C.E.P.R. Discussion Papers
We develop a theory linking â€œmisallocation,â€ i.e., dispersion in static marginal products of capital (MPK), to systematic investment risks. In our setup, firms differ in their exposure to these risks, which we show leads naturally to heterogeneity in firm-level risk premia and, more importantly, MPK. The theory predicts that cross-sectional dispersion in MPK (i) depends on cross-sectional dispersion in risk exposures and (ii) fluctuates with the price of risk, and thus is countercyclical. We document strong empirical support for these predictions. We devise a strategy to quantify variation in firm-level risk exposures using data on the dispersion of expected stock market returns. Our estimates imply that risk considerations explain almost 40% of observed MPK dispersion among US firms and in particular, can rationalize a large persistent component in firm-level MPK deviations. Our framework provides a sharp link between aggregate volatility, cross-sectional asset pricing and long-run economic performance â€“ MPK dispersion induced by risk premium effects, although not prima facie inefficient, lowers the average level of aggregate TFP by as much as 7%, suggesting large â€œproductivity costsâ€ of business cycles.
Keywords: Misallocation; Costs of business cycles; Cross-section of returns; Time-varying risk premia (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at email@example.com
Journal Article: Risk-adjusted capital allocation and misallocation (2022)
Working Paper: Risk-Adjusted Capital Allocation and Misallocation (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13205
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().