Abstract: Composition matters. The composition of assets in place and growth opportunities affect risk premia. Firms with growth opportunities in the form of intangible investments exposed to displacement risk have larger expected returns than firms with growth opportunities in the form of tangible investments. I develop a production-based asset pricing model showing that a firm's exposures to priced productivity and displacement risk depend on multiple firm characteristics. None of these characteristics alone can capture the firm's total exposure. Empirically, intangible investment positively predicts returns, and firms undertaking more intangible investment are more exposed to proxies for displacement risk. I develop six proxies to measure displacement risk shocks: three based on sorting firms into portfolios and three based on aggregate variables. A portfolio double-sorted on two key firm characteristics, the book-to-market ratio (including intangible capital) and the difference between the intangible and tangible investment rates, produces large excess returns that existing models cannot explain. This double-sort can explain the decline of the Value Premium.
Abstract: We introduce a novel log-linear identity linking a company’s market value to expected future markups, output growth, discount rates, and investments within a present-value framework. By distinguishing between realized and expected markups, we unveil five new empirical facts. (i) Expected markups account for one-third of the rise in aggregate firm values of U.S. public firms since 1980. (ii) The rise in aggregate expected markups is driven by a reallocation of market share towards high-expected-markup firms. Mergers have accelerated this trend with expected (but not realized) markups rising post merger. (iii) Expected markups are closely tied to fixed costs and investments, particularly in intangibles. (iv) There is a negative time-series relationship between expected markups and discount rates, but (v) there is a positive cross- sectional link to risk premia after accounting for other risk factors. These five facts can guide the development of macro-finance models.
Matteo Crosignani, Federal Reserve Bank of New York
Tim Eisert, Universidade Nova de Lisboa
Christian Eufinger, University of Navarra
Abstract: We document how the interaction of supply-chain pressures, heightened household inflation expectations, and firm pricing power contributed to the pandemic-era surge in consumer price inflation in the euro area. Initially, supply-chain pressures increased inflation through a cost-push channel and raised inflation expectations. Subsequently, the cost-push channel intensified as firms with high pricing power increased product markups in sectors witnessing high demand. Eventually, even though supply-chain pressures eased, these firms were able to further increase markups due to the stickiness of inflation expectations. The resulting persistent impact on inflation suggests supply-side impulses can generalize into broad-based inflation via an interaction of household expectations and firm pricing power.
