We show theoretically that the weak transmission of beliefs to actions induces a strong bias in basic asset pricing tests. In particular, expected returns can appear to decline in risk when investors weakly transmit their payoff expectations into willingness to pay. We experimentally test this...

We document that 20% of Compustat firms have above-median investment rates despite having below-median marginal product of capital (MPK), seemingly "misallocating" productive resources. These firms are typically younger and significantly more likely to experience a substantial upward jump in...

We argue that the competition for inelastically supplied capital results in a strong transmission of interest rates to the price of capital, weakening the conventional negative effect of interest rates on investment. We study this effect by exploiting geographic heterogeneity in the cash flow...

We show theoretically that the weak transmission of beliefs to actions induces a strong bias in basic asset pricing tests. In particular, expected returns can appear to decline in risk when investors weakly transmit their payoff expectations into willingness to pay. We experimentally test this...