Labor Hiring, Investment, and Stock Return Predictability in the Cross Section

Fisher College of Business Working Paper No. 2012-03-17

Charles A. Dice Center Working Paper No. 2012-17

52 Pages Posted: 15 Sep 2008 Last revised: 10 Feb 2014

See all articles by Frederico Belo

Frederico Belo

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

Xiaoji Lin

University of Minnesota

Santiago Bazdresch

Banco de México

Date Written: September 15, 2013

Abstract

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.

Keywords: Labor Hiring, Investment, q-Theory, Cross-Sectional Asset Pricing, Production-Based Asset Pricing

JEL Classification: E22, E23, E44, G12

Suggested Citation

Belo, Frederico and Lin, Xiaoji and Bazdresch, Santiago, Labor Hiring, Investment, and Stock Return Predictability in the Cross Section (September 15, 2013). Charles A. Dice Center Working Paper No. 2012-17. Available at SSRN: https://ssrn.com/abstract=1267462 or http://dx.doi.org/10.2139/ssrn.1267462

Frederico Belo (Contact Author)

University of Minnesota ( email )

19th Avenue South
Minneapolis, MN 55455
United States

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Xiaoji Lin

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Santiago Bazdresch

Banco de México

Av. 5 de Mayo No. 18
Col. Centro, Deleg. Cuauhtémoc
Ciudad de México, DF, CDMX 06059
Mexico
+525552372000 (Phone)

HOME PAGE: http://www.banxico.org.mx/

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