Work

Labor and the Market Value of the Firm

Year: 2007

Type: article

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 andlabor. 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 andinvestment over and above the capital stock.

Source: American Economic Review

DOI: 10.1257/aer.97.4.1419

Authors: Monika Merz, Eran Yashiv

Institutions: University of Bonn, Tel Aviv University

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: green

Funders: National IT Industry Promotion Agency, Economic and Social Research Council