Wage Differentials, Firm Investment, and Stock Returns
51 Pages Posted: 3 Mar 2016 Last revised: 12 Oct 2018
Date Written: October 6, 2018
This study investigates the effects of labor costs on firms’ capital investments and stock returns. I estimate wage premia across U.S. industries and show that the negative investment-return relation implied by q-theory is steeper for firms paying high wage premia than for firms paying low wage premia. An extended investment-based model predicts the interaction effect, showing the labor adjustment costs as key channel driving investment-return sensitivity. The inflexibility induced by labor costs offers new insights into asset prices and corporate investments.
Keywords: q-theory of investment, wage premium, labor market friction, corporate investment
JEL Classification: E22, E44, G12, G31, J31
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