A dynamic model featuring a stochastic technology frontier shows significant impact of technology adoption for asset prices. In equilibrium, firms operating with old capital are riskier because costly technology adoption restricts their flexibility in upgrading to the latest technology, making them more exposed to technology frontier shocks. Consistent with the model predictions, a long-short portfolio sorted on firm-level capital age earns an average value-weighted return of 9% per year among U.S. public companies. A proxy for technology frontier shocks captures the variation of the capital age portfolios with a positive risk price, corroborating the model mechanism.
Bibliographical noteFunding Information:
We thank Hengjie Ai, Rui Albuquerque, Frederico Belo, Andrea Caggese, Yen-cheng Chang, Zhanhui Chen, Max Croce, Cesare Robotti, Lukas Schmid, Gill Segal (Duke-UNC discussant), Ren? Stulz, H?kon Tretvoll, Selale Tuzel (WFA discussant), Colin Ward (SFS discussant), Lu Zhang and seminar participants at Boston University, CAPR Workshop on ?Investment & Production Based Asset Pricing?, Duke-UNC Asset Pricing Conference, European Finance Association, WFA, Bentley University, Cass Business School, Cornerstone Research, Federal Reserve Board, George Washington University, SFS Cavalcade, University of Calgary, and Warwick Business School for their comments. We are very grateful to Justus Baron and Julia Schmidt for sharing their data on technology standards, Ryan Israelsen for sharing the quality-adjusted investment goods price series, and Lorenzo Garlappi and Zhongzhi Song for sharing the quarterly proxy for investment-specific technology shocks. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Board or the Federal Reserve System. All errors are our own.
© 2019 Elsevier B.V.
- Capital age
- Stock returns
- Technology adoption
- Technology frontier shocks