Technology shocks, capital reallocation frictions and the cross-section of stock returns

© 2016 Dr. Mengyu ZhouI study the cross-sectional return implications of technology shocks through the channel of capital reallocation. I present a model in which capital reallocation frictions limit the ability of non-innovating firms to redeploy assets when facing technology shocks and force them to hold unproductive capital. As a result, the values of non-innovating firms depreciate more when reallocation frictions are higher. The frictions also amplify firms' risk exposure to technology shocks and hence the risk premium by altering consumption dynamics. Empirically, I find that the stock prices of non-innovating firms respond more negatively to technology shocks in industries with lower asset liquidity, while innovating firms' responses to technology shocks do not vary with the degree of asset liquidity in their industry. The results shed light on the role of capital reallocation in the creative destruction process and its asset pricing implications