The Asset Durability Premium

Abstract

This paper studies how the durability of assets affects the cross-section of stock returns. More durable assets incur lowers frictionless user costs but are more expensive, in the sense that they need more down payments making them hard to finance. In recessions, firms become more financially constrained and prefer cheaper less durable assets. As a result, the price of less durable assets is less procyclical and therefore less risky than that of durable assets. We provide strong empirical evidence to support this prediction. Among financially constrained stocks, firms with higher asset durability earn average returns about 5% higher than firms with lower asset durability. We develop a general equilibrium model with heterogeneous firms and collateral constraints to quantitatively account for such a positive asset durability premium.