We examine the importance of asset pricing anomalies (alphas) for the real economy. To this end, we develop a novel lumpy investment model that can incorporate such anomalies and yields closed-from solutions for the joint cross-sectional distributions of firm dynamics. Our findings indicate that informational ineffciencies measured by cross-sectional alphas can cause material real ineffciencies. This raises the possibility that agents that help eliminate them can provide significant value added to the economy. The framework reveals that alphas alone are poor indicators of real distortions, and that efficiency losses crucially depend on the persistence of alpha, the amount of mispriced capital, and the Tobin’s q of firms that are affected.

Joint work with Christian C. Opp (University of Pennsylvania – The Wharton School)

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