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Creative destruction and asset prices

  • Grammig, Joachim
  • Jank, Stephan

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 are more likely to be destroyed by serendipitous invention activity, and investors demand higher expected returns for bearing that risk. Large-growth stocks provide protection against creative destruction, so they receive expected return discounts. An ICAPM that accounts for creative destruction risk explains a considerable part of the cross-sectional return variation of size- and book-to-market-sorted portfolios. The estimated risk compensations associated with creative destruction are economically and statistically significant.

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Paper provided by University of Tuebingen, Faculty of Economics and Social Sciences in its series University of Tuebingen Working Papers in Economics and Finance with number 61.

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Date of creation: 2013
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Handle: RePEc:zbw:tuewef:61
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