Charles A. Dice Center Working Paper No. 2012-17
52 Pages Posted: 15 Sep 2008 Last revised: 10 Feb 2014
Date Written: September 15, 2013
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: 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