Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability

We explore the relationship between sticky wages and risk. Like operating leverage, sticky wages are a source of risk for the firm. Firms, industries, regions, or times with especially high or rigid wages are especially risky. If wages are sticky, then wage growth should negatively forecast future stock returns because falling wages are associated with even bigger falls in output, and increases in operating leverage. Indeed, this is the case in aggregate, industry, and U.S. state level data. Furthermore, this relation is stronger in industries and U.S. states with higher wage rigidity.

Keywords: Wage Rigidity, Equity Risk, Long Run Return Predictability, Cross Section of Asset Pricing

JEL Classification: E21, E23, E32, E44, G12

Suggested Citation: Suggested Citation

Favilukis, Jack Y and Lin, Xiaoji, Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability (November 30, 2015). Charles A. Dice Center Working Paper No. 2012-19, Fisher College of Business Working Paper No. 2012-03-019, Available at SSRN: https://ssrn.com/abstract=2158738 or http://dx.doi.org/10.2139/ssrn.2158738