Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability
University of British Columbia (UBC) - Division of Finance
Ohio State University (OSU) - Fisher College of Business
April 9, 2015
Charles A. Dice Center Working Paper No. 2012-19
Fisher College of Business Working Paper No. 2012-03-019
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
Date posted: October 8, 2012 ; Last revised: April 18, 2015
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