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http://ssrn.com/abstract=2158738
 
 

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


Jack Favilukis


London School of Economics & Political Science (LSE)

Xiaoji Lin


Ohio State University (OSU) - Fisher College of Business

September 9, 2013

Charles A. Dice Center Working Paper No. 2012-19
Fisher College of Business Working Paper No. 2012-03-019

Abstract:     
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.

Number of Pages in PDF File: 52

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

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

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Date posted: October 8, 2012 ; Last revised: September 9, 2013

Suggested Citation

Favilukis, Jack and Lin, Xiaoji, Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability (September 9, 2013). Charles A. Dice Center Working Paper No. 2012-19; Fisher College of Business Working Paper No. 2012-03-019. Available at SSRN: http://ssrn.com/abstract=2158738 or http://dx.doi.org/10.2139/ssrn.2158738

Contact Information

Jack Favilukis
London School of Economics & Political Science (LSE) ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
Xiaoji Lin (Contact Author)
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
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