Product Market Competition, Labor Mobility, and the Cross-Section of Stock Returns
Forthcoming in Review of Asset Pricing Studies
74 Pages Posted: 27 May 2020 Last revised: 4 Jan 2023
Date Written: January 3, 2023
Abstract
This paper explores the impact of product market competition on the positive relation between labor mobility (LM) and future returns. We develop a production-based model and formalize the intuition that low exposure to systematic risk in a concentrated industry limits LM's amplifying effect on operating leverage. Therefore, the model predicts a stronger positive relation between LM and expected returns for firms in competitive industries. Consistent with the model's prediction, we empirically find that LM predicts returns only among firms in competitive industries. This evidence suggests that the intensity of competition in firms' product market potentially drives the positive LM-return relation.
Keywords: Labor mobility; Product market competition; Risk premium; Stock returns
JEL Classification: G12; G14; J69
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