The average capital growth rate across firms declines sharply during a recession, and recovers only slowly. We provide a micro-founded explanation for this and several new stylized facts of investment asymmetry. Our investment model features various degrees of reversibility, cyclical macroeconomic shocks, and uncertainty about the state of the economy. Model simulations replicate strikingly different empirical patterns of capital growth rates at the aggregate and firm levels, featuring no slope asymmetry and a positive level asymmetry at the firm level, negative slope and level asymmetries at the aggregate level, and a positive relation between the industry-level slope asymmetry and asset illiquidity.

Intermediaries such as financial advisers serve as an interface between portfolio managers and investors. A large fraction of their compensation is often provided through kickbacks from the portfolio manager. We provide an explanation for the widespread use of intermediaries and kickbacks. Depending on the degree of investor sophistication, kickbacks are used either for price discrimination or aggressive marketing. We explore the effects of these arrangements on fund size, flows, performance, and investor welfare. Kickbacks allow higher management fees to be charged, thereby lowering net returns. Competition among active portfolio managers reduces kickbacks and increases the independence of advisory services.