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The risks of old capital age: Asset pricing implications of technology adoption

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  • Lin, Xiaoji
  • Palazzo, Berardino
  • Yang, Fan

Abstract

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.

Suggested Citation

  • Lin, Xiaoji & Palazzo, Berardino & Yang, Fan, 2020. "The risks of old capital age: Asset pricing implications of technology adoption," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 145-161.
    • Handle: RePEc:eee:moneco:v:115:y:2020:i:c:p:145-161
    DOI: 10.1016/j.jmoneco.2019.06.001
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