FINTECH THRUST SEMINAR | A Unified Explanation for the Decline in Value Premium and Rising Markups
A Unified Explanation for the Decline in Value Premium and Rising Markups
Abstract:
We provide a unified explanation for two significant trends over recent decades: the decline of the value premium and the rise of the markup. We show that these trends are primarily driven by high-markup firms, while both the value premium and the markup remain stable among firms with low markups. We develop a dynamic monopolistic competitive equilibrium model featuring a stochastic technology frontier and heterogeneity in firms’ technology adoption decisions to explain these findings. We show that both the cross-time increase in the efficiency of the aggregate technology frontier and cross-firm heterogeneities in adoption benefits and demand elasticity are crucial to generate the observed trends in markups and the value premium, as well as the cross-sectional difference in these trends.
Dr. Xiaoji Lin is the US Bancorp Professor in Financial Markets and Institutions and a Professor of Finance at the Carlson School of Management, University of Minnesota. He is also a Fellow at the Asian Bureau of Finance and Economic Research (ABFER). Prior to joining Minnesota, Dr. Lin taught at the London School of Economics and Political Science and the Ohio State University. His research spans asset pricing, corporate finance, and macroeconomics, and his work has been published at prestigious academic journals including American Economic Review, Journal of Political Economy, Journal of Financial Economics, Journal of Monetary Economics, and Review of Financial Studies. Dr. Lin's doctoral thesis won the Trefftzs award at the 2008 Western Finance Association annual meetings. He is also the recipient of the Carlson School Outstanding Research Award (2021) and the International Research Excellence Award of China International Risk Forum (2022).