Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability

Jack Favilukis and Xiaoji Lin

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We explore the relationship between sticky wages and risk. Like operating leverage, sticky wages are a source of risk for the firm. Firms, industries, or times with especially high or rigid wages are especially risky. If wages are sticky then wage growth should negatively forecast future stock returns because falling wages are associated with even bigger falls in output, and increases in operating leverage. Indeed, we find this to be the case in aggregate data, and in industry data. Furthermore, we find that industries with higher wage rigidity have a more negative relationship between wages and returns.

JEL-codes: E21 E23 E32 E44 G12 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-bec and nep-mac
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Citations: View citations in EconPapers (2)

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Journal Article: Does wage rigidity make firms riskier? Evidence from long-horizon return predictability (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2012-19

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