Abstract

http://ssrn.com/abstract=2155295
 


 



Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor


Frederico Belo


University of Minnesota; National Bureau of Economic Research (NBER)

Xiaoji Lin


Ohio State University (OSU) - Fisher College of Business

Jun Li


University of Texas at Dallas

Xiaofei Zhao


University of Texas at Dallas - Naveen Jindal School of Management

July 2016

Fisher College of Business Working Paper No. 2012-03-025
Charles A. Dice Center Working Paper No. 2012-25

Abstract:     
We investigate the impact of labor-force heterogeneity on asset prices in a neoclassical model with labor and capital adjustment costs, and with aggregate productivity and adjustment cost shocks. The negative firms’ hiring rate-expected stock return relation identified in previous studies should be steeper in industries that rely relatively more on high skill workers because it is more costly to replace a high skill than a low skill worker. Empirically, a hiring spread portfolio that goes long low hiring rate firms and short high hiring rate firms earns an average annual stock return of 8.6% in high skill industries, and only 0.9% in low skill industries. This pattern in returns is not explained by the CAPM. According to the model, the CAPM fails because the high returns of the hiring spread portfolio in the high skill industry are driven by firms’ exposure to the aggregate adjustment cost shock. We provide empirical support for this economic mechanism using a model-implied adjustment cost shock proxy.

Number of Pages in PDF File: 60

Keywords: Labor Heterogeneity, Labor Skill, Labor Hiring, Investment, Stock Return Predictability, Cross-Sectional Asset Pricing, q-theory, Adjustment cost shocks

JEL Classification: E22, E23, E44, G12


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Date posted: October 2, 2012 ; Last revised: July 29, 2016

Suggested Citation

Belo, Frederico and Lin, Xiaoji and Li, Jun and Zhao, Xiaofei, Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor (July 2016). Fisher College of Business Working Paper No. 2012-03-025; Charles A. Dice Center Working Paper No. 2012-25. Available at SSRN: http://ssrn.com/abstract=2155295 or http://dx.doi.org/10.2139/ssrn.2155295

Contact Information

Frederico Belo (Contact Author)
University of Minnesota ( email )
19th Avenue South
Minneapolis, MN 55455
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Xiaoji Lin
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States

Jun Li
University of Texas at Dallas ( email )
800 West Campbell Road, SM 31
Richardson, TX 75080
United States
972-883-4422 (Phone)
Xiaofei Zhao
University of Texas at Dallas - Naveen Jindal School of Management ( email )
800 West Campbell Road, SM 31
Richardson, TX 75080
United States
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