Labor Hiring, Investment and Stock Return Predictability in the Cross Section

Abstract:     
We show that firms with lower labor hiring and investment rates have on average higher future stock returns in the cross-section of US publicly traded firms. The predictability holds even after controlling for other known stock return predictors, varies across firms' technologies and exhibits a clear trend over time. We propose a production-based asset pricing model with adjustment costs in both labor and capital inputs to explain the empirical findings. Labor adjustment costs make hiring decisions forward looking. Convex adjustment costs imply that the returns of firms that are investing or hiring relatively less fluctuate more closely with economic conditions. Thus the firms' labor hiring and investment rates predict stock returns in the data because these variables proxy for the firms' time-varying conditional beta.

Keywords: Labor Hiring, Investment, Stock Return Predictability, Cross-Sectional Asset Pricing, Production-Based Asset Pricing

JEL Classifications: E22, E23, E44, G12

Working Paper Series