Labor hiring, investment, and stock return predictability in the cross section

Frederico Belo, Xiaoji Lin, Santiago Bazdresch

Research output: Contribution to journalArticlepeer-review

63 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)129-177
Number of pages49
JournalJournal of Political Economy
Volume122
Issue number1
DOIs
StatePublished - Feb 2014

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