Learning and the Capital Age Premium

99 Pages Posted: 16 Aug 2018 Last revised: 27 Oct 2020

See all articles by Kai Li

Kai Li

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management

Chi-Yang Tsou

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management

Chenjie Xu

Shanghai University of Finance and Economics - Department of Finance

Date Written: February 26, 2019

Abstract

We introduce imperfect information and parameter learning into a production-based asset pricing model. Our model features slow learning about firms' exposure to aggregate productivity shocks over time. In contrast to a full information case, our framework provides a unified explanation for the stylized empirical features of the cross-section of stocks that differ in capital age: old capital firms (1) have higher capital allocation efficiency; (2) are more exposed to aggregate productivity shocks and, hence, earn higher expected returns, which we refer to as capital age premium; and (3) have shorter cash-flow duration, when compared to young capital firms.

Keywords: parameter learning, capital age, cross-section of expected returns, capital misallocation, cash flow duration

JEL Classification: E2, E3, G12

Suggested Citation

Li, Kai and Tsou, Chi-Yang and Xu, Chenjie, Learning and the Capital Age Premium (February 26, 2019). Available at SSRN: https://ssrn.com/abstract=3225041 or http://dx.doi.org/10.2139/ssrn.3225041

Kai Li (Contact Author)

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management ( email )

Clear Water Bay
Kowloon
Hong Kong

Chi-Yang Tsou

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management ( email )

Clear Water Bay
Kowloon
Hong Kong

Chenjie Xu

Shanghai University of Finance and Economics - Department of Finance ( email )

Shanghai, 200433
China

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