Product Market Competition, Labor Mobility, and the Cross-Section of Stock Returns

Abstract

This paper explores the impact of product market competition on the positive relation between labor mobility (LM) and future stock returns. We develop a production-based model, which predicts a stronger positive relation between LM and expected returns for firms in highly competitive industries. Consistent with the model's prediction, empirical results from double-sorted portfolios and cross-sectional regressions suggest 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