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

Charles A. Dice Center Working Paper No. 2012-19

Fisher College of Business Working Paper No. 2012-03-019

36 Pages Posted: 8 Oct 2012 Last revised: 17 Dec 2015

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Xiaoji Lin

Ohio State University (OSU) - Fisher College of Business

Date Written: November 30, 2015

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.

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

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

Suggested Citation

Favilukis, Jack Y and Lin, Xiaoji, Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability (November 30, 2015). Charles A. Dice Center Working Paper No. 2012-19; Fisher College of Business Working Paper No. 2012-03-019. Available at SSRN: https://ssrn.com/abstract=2158738 or http://dx.doi.org/10.2139/ssrn.2158738

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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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