The Risks of Old Capital Age: Asset Pricing Implications of Technology Adoption

59 Pages Posted: 9 Dec 2014 Last revised: 12 Apr 2019

See all articles by Xiaoji Lin

Xiaoji Lin

University of Minnesota

Berardino Palazzo

Board of Governors of the Federal Reserve System

Fan Yang

University of Connecticut - Department of Finance

Date Written: April 8, 2019

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 flexibilities 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.

Keywords: Technology adoption, technology frontier shock, capital age, stock returns

JEL Classification: E23, E44, G12

Suggested Citation

Lin, Xiaoji and Palazzo, Berardino and Yang, Fan, The Risks of Old Capital Age: Asset Pricing Implications of Technology Adoption (April 8, 2019). Available at SSRN: https://ssrn.com/abstract=2535409 or http://dx.doi.org/10.2139/ssrn.2535409

Xiaoji Lin (Contact Author)

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Berardino Palazzo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Fan Yang

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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