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 15, 2013
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 U.S. firms, a 10 percentage points increase in the firm’s hiring rate is associated with a 1.5 percentage points decrease in the firm’s annual risk premium. We propose an investment-based model with stochastic labor adjustment costs to explain this finding. Firms with high hiring rates are expanding firms that incur high adjustment costs. If the economy experiences a shock that lowers adjustment costs, these firms benefit the most. The corresponding increase in firm value operates as a hedge against these shocks, explaining the lower risk premium of these firms in equilibrium.
Number of Pages in PDF File: 52
Keywords: Labor Hiring, Investment, q-Theory, Cross-Sectional Asset Pricing, Production-Based Asset Pricing
JEL Classification: E22, E23, E44, G12
Date posted: September 15, 2008 ; Last revised: February 10, 2014
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