Expectation driven business cycles with limited enforcement

•Empirically news shocks yield positive response of macro quantities and stock prices.•Our model gets the stock price response right.•First time achieved in real one-sector model with two input factors.•The key mechanism is financial frictions in the form of limited enforcement.•Generates additional effect from future productivity on today's investment.

We explore shocks to expected future productivity in a model with limited enforcement of financial contracts. A microfounded collateral constraint implies that good news about future productivity yield an increase in stock prices, available credit and a general economic expansion.