Creative Destruction and Asset Prices
Forthcoming Journal of Financial and Quantitative Analysis
54 Pages Posted: 19 Mar 2011 Last revised: 31 Jan 2015
Date Written: January 31, 2015
We relate Schumpeter's notion of creative destruction to asset pricing, thereby offering a novel explanation of size and value premia. We argue that small-value firms must offer higher expected returns to compensate for the risk posed by serendipitous invention activity, whereas large-growth stocks provide protection against creative destruction and receive expected return discounts. A two-factor model that accounts for creative destruction risk effectively explains the cross-sectional return variation of size and book-to-market sorted portfolios. The estimated risk compensations associated with creative destruction are substantial and statistically significant, indicating their relevance for asset pricing.
Keywords: creative destruction, asset prices, size premium, size premium, invention activity
JEL Classification: G10, G12
Suggested Citation: Suggested Citation