Creative destruction and asset prices

Joachim Grammig and Stephan Jank

No 61, University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics

Abstract: We relate Schumpeter's notion of creative destruction to asset pricing, thereby offering a novel explanation of size and value premia. We argue that small-value firms are more likely to be destroyed by serendipitous invention activity, and investors demand higher expected returns for bearing that risk. Large-growth stocks provide protection against creative destruction, so they receive expected return discounts. An ICAPM that accounts for creative destruction risk explains a considerable part of the cross-sectional return variation of size- and book-to-market-sorted portfolios. The estimated risk compensations associated with creative destruction are economically and statistically significant.

Keywords: Creative destruction; Asset prices; Size premium; Invention activity (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2013
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Related works:
Working Paper: Creative destruction and asset prices (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuewef:61

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