Market Concentration, Capital Misallocation, and Asset Pricing [New version: Oct 2026!]
Pacific-Basin Finance Journal Research Excellence Award at the 2025 MRS International Risk Conference
John A. Doukas PhD Best Paper Award at the EFMA Annual Meeting 2025
Best PhD Paper Award at the 7th Asset Pricing Conference by LTI@UniTo
Superstar firms, which dominate stock markets through their large size and high markups, can distort efficient capital allocation. This paper empirically studies the asset pricing implications of superstar firms through the channel of capital misallocation, measured by the cross-sectional dispersion in the marginal product of capital (MPK). Specifically, I decompose this measure into capital misallocation (1) among superstar firms, (2) among other firms, and (3) between these two groups. I find that innovations in the third component, termed the "MPK spread", are negatively priced in the cross-section of stock returns. Stocks with negative exposure to the MPK spread outperform stocks with positive exposure by 5.44% per year. A higher MPK spread predicts lower consumption, employment, and GDP growth over the next four and eight quarters. Consistent with the Intertemporal CAPM, capital misallocation between superstar and non-superstar firms represents a state variable, and its innovations capture a macroeconomic risk factor.
Intermediary Asset Pricing Through the Lens of a Demand System
With Dongryeol Lee
How does broker-dealers’ leverage shift asset prices when their assets under management are relatively small? We explore the channel through which broker-dealers extend leverage to hedge funds using an asset demand system. During recessions, broker-dealers face binding leverage constraints and reduce their borrowing to hedge funds. Then, hedge funds are forced to sell assets and deleverage, creating demand pressures that shift asset prices. We find that hedge funds exert the largest price impact across all stocks among institutions, and their price impact increases substantially during crises as they need to deleverage. On average, a 1% increase in broker-dealers’ leverage raises the price impact of the average hedge fund by 2% in the following year. These impacts are more pronounced among illiquid stocks. Our findings suggest that hedge funds significantly influence stock prices when broker-dealers’ leverage constraints are binding.
Characteristic-based factors, such as value, momentum, and low volatility, are constructed from the same universe of stocks. Therefore, they can contain some of the same stocks. Although the degree of overlap among these factors is not excessive, I find that the overlap matters. Stocks included simultaneously in the same leg across multiple factors, so-called overlapping stocks, earn an average abnormal return of 66 basis points per month. In contrast, pure factor stocks included in a single factor earn on average, across all factors, only 5 basis points per month, despite similar industry composition, institutional ownership, and portfolio turnover. Further, the portfolio of overlapping stocks is priced in the cross-section of stock returns, while the portfolio of all pure factor stocks is not. Exposures to macroeconomic and liquidity risks cannot explain the return difference. Only in the short leg, overlapping stocks are more exposed to investor sentiment and have a higher short interest than pure factor stocks.