| This dissertation studies the asset pricing implications of a putty-clay technology. This technology delivers a new theoretical source of variation for the aggregate market-to-book ratio: under some conditions, low productivity firms are more procyclical, and since they dominate the cross-sectional distribution of firms, the aggregate stock market is procyclical as well. Low productivity firms are also more risky, generating the cross-sectional value premium. I assess the quantitative importance of this effect, first through numerical simulations, then through empirical work. In the simulations the effect appears to be small. However when I bring the aggregate production-side implications of the model to the data, I show that it can deliver a volatile stock return that leads the business cycle. My empirical work also documents that the earnings of firms with low margins or low market-to-book are more sensitive to the business cycle, which supports the cross-sectional implications of the model. |
