The risks of old age: Asset pricing implications of technology adoption∗

We study the impact of the technological change on asset prices in a dynamic model economy that features a stochastic technology frontier and costly technology adoption. Firms adopt the latest technology embodied in new capital to reach the stochastic technology frontier, but this decision entails an adoption cost. The model predicts that firms operating with old capital are more risky and hence offer higher expected returns than firms using young capital. This is because old capital firms are more likely to upgrade their capital in the near future and hence are more exposed to shocks driving the technology frontier. Our empirical analyses support the model’s predictions. We find an annual return spread of 9% between old and young capital firms. The standard asset pricing models fail to explain this return spread, while a measure of technology adoption shocks prices well the capital age portfolios. JEL Classification: E23, E44, G12