Journal of Financial Economics Vol. 145 No. 3 2022
Risk-adjusted capital allocation and misallocation
Abstract
We develop a theory linking “misallocation,” i.e., dispersion in marginal products of capital (MPK), to macroeconomic risk. Dispersion in MPK depends on (i) heterogeneity in firm-level risk and (ii) the magnitude of risk premia. Stock market-based measures imply that risk considerations explain about 25% of MPK dispersion among US firms and rationalize a large persistent component in firm-level MPK, consistent with the micro-level data. Time-varying risk premia lead to countercyclical MPK dispersion alongside procyclical capital reallocation. Risk-based MPK dispersion in part shapes the dynamic behavior of aggregate productivity, namely, its long-run level, volatility and skewness.
- DOI
- 10.1016/j.jfineco.2022.06.001
- Volume
- 145
- Issue
- 3
- Pages
- 684-705
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib