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Risk, Economic Growth and the Value of U.S. Corporations

This paper documents a strong association between total factor productivity (TFP) growth and the value of U.S. corporations (measured as the value of equities and net debt for the U.S. corporate sector) throughout the postwar period. Persistent fluctuations in the first two moments of TFP growth predict two-thirds of the medium-term variation in the value of U.S. corporations relative to gross domestic product (hence-forth value-output ratio). An increase in the conditional mean of TFP growth by1% is associated to a 21% increase in the value-output ratio, while this indicator declines by 12% following a 1% increase in the standard deviation of TFP growth. A possible explanation for these findings is that movements in the first two moments of aggregate productivity affect the expectations that investors have regarding future corporate payouts as well as their perceived risk. We develop a dynamic stochastic general equilibrium model with the aim of verifying how sensible this interpretation is. The model features recursive preferences for the households, Markov-Switching regimes in the first two moments of TFP growth, incomplete information and monopolistic rents. Under a plausible calibration and including all these features, the model can account for a sizable fraction of the elasticity of the value-output ratio to the first two moments of TFP growth.