Work

Labor Hiring, Investment, and Stock Return Predictability in the Cross Section

Year: 2014

Type: article

Abstract: We study the impact of labor market frictions on asset prices. In the cross section of US firms, a 10 percentage point increase in the firm’s hiring rate is associated with a 1.5 percentage point decrease in the firm’s annual risk premium. We propose an investment-based model with stochastic labor adjustment costs to explain this finding. Firms with high hiring rates are expanding firms that incur high adjustment costs. If the economy experiences a shock that lowers adjustment costs, these firms benefit the most. The corresponding increase in firm value operates as a hedge against these shocks, explaining the lower risk premium of these firms in equilibrium.

Source: Journal of Political Economy

DOI: 10.1086/674549

Authors: Frederico Belo, Xiaoji Lin, Santiago Bazdresch

Institutions: University of Minnesota, National Bureau of Economic Research, The Ohio State University

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: green

OpenAlex ID: W3122781175