Misallocation or Risk-Adjusted Capital Allocation?
Joel David ()
No 323, 2018 Meeting Papers from Society for Economic Dynamics
Standard, frictionless neoclassical theory of investment predicts that the expected corporate marginal product of capital (MPK) depends on firms' exposure to systematic risk and the price of that risk. This implies that the cross-sectional dispersion in MPK i) depends on cross-sectional variation in risk exposures and ii) fluctuates with the price of risk, and thus is countercyclical. We empirically evaluate these predictions and document strong support for them. In particular, a long-short portfolio of high minus low MPK stocks earns significant and countercyclical excess returns forecastable by standard return predictors. A calibrated investment model suggests that ex ante variation in risk exposure can rationalize permanent dispersion in MPK. These findings suggests that a substantial fraction of dispersion in MPK, often dubbed misallocation, is effectively risk adjusted capital allocation.
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
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:red:sed018:323
Access Statistics for this paper
More papers in 2018 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().