Learning and the Capital Age Premium
99 Pages Posted: 16 Aug 2018 Last revised: 27 Oct 2020
Date Written: February 26, 2019
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
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