Abstract
This paper measures the capital misallocation level across different countries. The level of capital misallocation differs substantially across different countries and is counter-cyclical in most countries. The cyclical component of capital misallocation measure shows some weak predictive power on future excess return in US: a positive 1 standard deviation away from the long term trend in capital misallocation increases the annualized equity premium by 0.68% to 1.4% for different holding periods. The international evidence is mixed. The predictive power of capital misallocation is there only for some countries and is not robust for different misallocation measures.