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Creative Destruction and Asset Prices

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  • Grammig, Joachim
  • Jank, Stephan

Abstract

We relate Schumpeter’s notion of creative destruction to asset pricing, thereby offering a novel explanation of size and value premia. We argue that small-value firms must offer higher expected returns to compensate for the risk posed by serendipitous invention activity, whereas large-growth stocks provide protection against creative destruction and receive expected return discounts. A 2-factor model that accounts for creative-destruction risk effectively explains the cross-sectional return variation of size- and book-to-market-sorted portfolios. The estimated risk compensations associated with creative destruction are substantial and statistically significant, indicating their relevance for asset pricing.

Suggested Citation

  • Grammig, Joachim & Jank, Stephan, 2016. "Creative Destruction and Asset Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(6), pages 1739-1768, December.
    • Handle: RePEc:cup:jfinqa:v:51:y:2016:i:06:p:1739-1768_00
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    Cited by:

    1. Theissen, Erik & Zimmermann, Lukas, 2020. "Do contented customers make shareholders wealthy? Implications of intangibles for security pricing," CFR Working Papers 20-12, University of Cologne, Centre for Financial Research (CFR).
    2. Sönksen, Jantje & Grammig, Joachim, 2021. "Empirical asset pricing with multi-period disaster risk: A simulation-based approach," Journal of Econometrics, Elsevier, vol. 222(1), pages 805-832.

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