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

Xiaoji Lin, Santiago Bazdrech and Frederico Belo

FMG Discussion Papers from Financial Markets Group

Abstract: We document that the firm level hiring rate predicts stock returns in the cross-section of US publicly traded firms even after controlling for investment, size, book-to-market and momentum as well as other known predictors of stock returns. The predictability shows up in both Fama-MacBeth cross sectional regressions and in portfolio sorts and it is robust to the exclusion of micro cap firms from the sample. We propose a production-based asset pricing model with adjustment costs in labor and capital that replicates the main empirical findings well. Labor adjustment costs makes hiring decisions forward looking in nature and thus informative about the firms’ expectations about future cash-flows and risk-adjusted discount rates. The model implies that the investment rate and the hiring rate predicts stock returns because these variables proxy for the firm’s time-varying conditional beta.

New Economics Papers: this item is included in nep-bec and nep-lab
Date: 2009-03

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