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Investing in misallocation

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  • Kılıç, Mete
  • Tüzel, Şelale

Abstract

We document that 20% of Compustat firms exhibit above-median investment rates despite having below-median marginal product of capital (MPK), seemingly “misallocating” resources. These firms are typically younger and more likely to experience substantial upwards jumps in sales and MPK in subsequent years. They contribute significantly to innovation, and their investments predict future aggregate productivity, creating value beyond their current MPK. We propose and estimate a simple endogenous firm growth model that captures key cross-sectional features and enables counterfactual analysis. Ignoring the potential for future jumps in hypothetical investment policies reduces MPK and investment dispersion but also lowers aggregate productivity.

Suggested Citation

  • Kılıç, Mete & Tüzel, Şelale, 2026. "Investing in misallocation," Journal of Financial Economics, Elsevier, vol. 176(C).
    • Handle: RePEc:eee:jfinec:v:176:y:2026:i:c:s0304405x25002168
    DOI: 10.1016/j.jfineco.2025.104208
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    Keywords

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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