Labor-Technology Substitution: Implications for Asset Pricing

60 Pages Posted: 24 Nov 2015 Last revised: 17 Nov 2016

Miao Ben Zhang

University of Southern California - Marshall School of Business

Date Written: November 16, 2016

Abstract

This paper studies the asset pricing implications of a firm's opportunities to replace routine-task labor with automation. I develop a model in which firms optimally undertake this replacement when their productivity is low. Hence, firms with routine-task labor maintain a replacement option that hedges their value against unfavorable macroeconomic shocks and lowers their expected returns. Using establishment-level occupational data, I construct a measure of firms' share of routine-task labor. Compared to their industry peers, firms with a higher share of routine-task labor (i) invest more in machines and reduce more routine-task labor during economic downturns, and (ii) have lower expected returns.

Keywords: Routine-Biased Technological Change, Routine-Task Labor, Stock Returns

JEL Classification: E22, E23, G12, J24

Suggested Citation

Zhang, Miao Ben, Labor-Technology Substitution: Implications for Asset Pricing (November 16, 2016). Available at SSRN: https://ssrn.com/abstract=2692601

Miao Ben Zhang (Contact Author)

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

701 Exposition Blvd, HOH-231
Los Angeles, CA 90089
United States

HOME PAGE: http://www.MiaoBenZhang.com/

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