Technology Adoption, Vintage Capital and Asset Prices
Ohio State University (OSU) - Fisher College of Business
October 1, 2009
We study technology adoption, risk and expected returns using a dynamic equilibrium model with production. The central insight is that optimal technology adoption is an important driving force of the cross section of stock returns. The model predicts that technology adopting firms are less risky than non-adopting firms. Intuitively, by restricting firms from freely upgrading existing capital to the technology frontier, costly technology adoption reduces the flexibility of firms in smoothing dividends, and hence generates the risk dispersion between technology adopting firms and non-adopting firms. The model explains qualitatively and in many cases quantitatively empirical regularities: (i) The positive relation between firm age and stock returns; (ii) firms with high investment on average are younger and earn lower returns than firms with low investment; and (iii) growth firms on average are younger than value firms, and the value premium is increasing in firm age.
Number of Pages in PDF File: 36
Keywords: Technology Adoption, Vintage Capital, Firm Age, Investment, Stock Returns
JEL Classification: E23, E44, G12
Date posted: July 21, 2009 ; Last revised: March 16, 2010
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