Firm Level Productivity, Risk, and Return

49 Pages Posted: 27 Feb 2011 Last revised: 7 Feb 2013

See all articles by Ayse Imrohoroglu

Ayse Imrohoroglu

University of Southern California - Marshall School of Business

Selale Tuzel

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: January 2013

Abstract

This paper provides new evidence about the link between firm level total factor productivity (TFP) and stock returns. We estimate firm level TFP and show that it is strongly related to several firm characteristics such as size, the book to market ratio, investment, and hiring rate. Low productivity firms earn a significant premium over high productivity firms in the following year, and this premium is countercyclical. We show that a production based asset pricing model calibrated to match the cross section of measured firm level TFPs can replicate the empirical relationship between TFP, many firm characteristics, and stock returns. Our results offer an explanation as to how these firm characteristics rationally predict returns.

Keywords: Firm Level Productivity, Cross Section of Returns

JEL Classification: D2, E23, E32, E44, G12

Suggested Citation

Imrohoroglu, Ayse and Tuzel, Selale, Firm Level Productivity, Risk, and Return (January 2013). Available at SSRN: https://ssrn.com/abstract=1770264 or http://dx.doi.org/10.2139/ssrn.1770264

Ayse Imrohoroglu

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States
213-740-6518 (Phone)
213-740-6650 (Fax)

Selale Tuzel (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

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