Asset Pricing with Entry and Imperfect Competition. November 2012. (Local download)
Job Market Paper
I study the implications of fluctuations in new firm creation across industries for asset prices and macroeconomic quantities. I write a general equilibrium model with heterogeneous industries allowing for firm entry and time variation in markups. Entrants into an industry increase competition and displace incumbents' monopoly rents. This mechanism is strongest in industries that exhibit high profit margins and high elasticity of innovation to the aggregate cost of entry. A positive shock to the aggregate cost of entry increases the marginal utility of consumption: the price of entry risk is negative. Therefore firms with more exposure to displacement have higher expected excess returns. Using micro level data on entry rates, I trace out the impact of firm creation on incumbent firms' profitability and stock returns. The effect is strongest for the types of industries predicted by the model. I confirm that aggregate entry risk is priced: differential exposure to the aggregate entry shock explains a large fraction of the cross-industry variation in expected returns.
Buyout Activity and Aggregate Discount Rates (with Valentin Haddad and Matthew Plosser). 2012. (Local download)
Prof. Jonathan A. Parker (Chair)
Prof. Martin Eichenbaum
Prof. Lars Peter Hansen
Prof. Dimitris Papanikolaou