Labor Hiring, Investment, and Stock Return Predictability in the Cross Section
University of Minnesota; National Bureau of Economic Research (NBER)
Ohio State University (OSU) - Fisher College of Business
University of Minnesota - Finance Department
September 25, 2012
Fisher College of Business Working Paper No. 2012-03-17
Charles A. Dice Center Working Paper No. 2012-17
We study the impact of labor market frictions on asset prices in the cross section of US publicly traded firms. On average, firms with low hiring rates have higher future stock returns than firms with high hiring rates, a difference of 5.2% per annum. Interpreting a hiring decision as analogous to an investment decision, we propose a dynamic neoclassical investment-based model with labor and capital adjustment costs to explain this hiring return spread. Firms that are hiring relatively more have lower macroeconomic risk which explains why high hiring rates predicts low stock returns. The model matches the observed levels of the hiring return spread, key properties of the firm-level hiring and investment rates, and other empirical regularities. Our analysis suggest that labor market frictions can have a significant impact on asset prices in financial markets.
Number of Pages in PDF File: 51
Keywords: Labor Hiring, Investment, q-Theory, Cross-Sectional Asset Pricing, Production-Based Asset Pricing
JEL Classification: E22, E23, E44, G12working papers series
Date posted: September 15, 2008 ; Last revised: October 24, 2012
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