Collective Learning about Systematic Risk

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)33_Other conference paperpeer-review

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Original languageEnglish
Publication statusPresented - 18 Dec 2019

Conference

Title2019 Wellington Finance Summit
LocationVictoria University of Wellington
PlaceNew Zealand
CityWellington
Period18 December 2019

Abstract

We present an investment-based asset pricing model in which firms' exposure to systematic risk is uncertain. Beliefs about this parameter are updated from collective observations of firms' peers, causing an endogenous shift in the discount rate that should affect firms' real decisions and market valuations. We empirically show that the mean belief about risk exposure, which evolves through this collective learning process, negatively predicts the investment-capital ratio and the market-to-book ratio and positively predicts the implied cost of capital. In addition, greater precision in beliefs about the risk exposure parameter lowers the cost of capital and, in turn, raises capital investment, consistent with the model predictions. In contrast, an alternative risk estimate based on firms' individual histories is only insignificantly connected to the firm observables, offering evidence of the collective nature of learning.

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Information for this record is supplemented by the author(s) concerned.

Citation Format(s)

Collective Learning about Systematic Risk. / Kim, Yongjin; Li, Kai.

2019. 2019 Wellington Finance Summit, Wellington, New Zealand.

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)33_Other conference paperpeer-review