Labor and the Market Value of the Firm

53 Pages Posted: 13 Jan 2004

See all articles by Monika Merz

Monika Merz

University of Bonn - Faculty of Law & Economics; IZA Institute of Labor Economics

Eran Yashiv

Tel Aviv University - Eitan Berglas School of Economics; CEP, LSE; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Date Written: December 2003

Abstract

What role does labor play in firms' market value? We explore this question using a production-based asset pricing model with frictions in the adjustment of both capital and labor. We posit that hiring of labor is akin to investment in capital and that the two interact, with the interaction being a crucial determinant of market value behavior. We use aggregate U.S. corporate sector data to estimate firms' optimal hiring and investment decisions and the consequences for firms' value. We then decompose this value, thereby quantifying the link between firms' market value and gross hiring flows, employment, gross investment and physical capital. We find that a conventional specification - quadratic adjustment costs for capital and no hiring costs - performs poorly. Rather hiring and investment flows, unlike employment and capital stocks, are volatile and both are essential to account for market volatility. A key result is that firms' value embodies the value of hiring and investment over and above the capital stock.

Keywords: production-based asset pricing, labor market frictions, gross flows, Q-model, GMM

JEL Classification: E22, E23, E24, G12

Suggested Citation

Merz, Monika and Yashiv, Eran, Labor and the Market Value of the Firm (December 2003). IZA Discussion Paper No. 965. Available at SSRN: https://ssrn.com/abstract=487322

Monika Merz (Contact Author)

University of Bonn - Faculty of Law & Economics ( email )

Postfach 2220
D-53012 Bonn
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Eran Yashiv

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 9715 (Phone)
+972 3 640 9908 (Fax)

HOME PAGE: http://www.tau.ac.il/~yashiv/

CEP, LSE ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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