Firm Level Productivity, Risk, and Return

Ayse Imrohoroglu and Selale Tuzel
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Selale Tuzel: University of Southern California

No 21, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: This paper documents a strong link between firm level total factor productivity (TFP) and several firm characteristics that are known to predict future stock returns, such as size, the book to market ratio, investment, and hiring rate. TFP is positively related to contemporaneous stock returns and negatively related to future excess returns and ex-ante discount rates. Low productivity firms on average earn a 6% annual premium over high productivity firms in the following year and the premium is countercyclical. We interpret the spread in the average returns across these portfolios as the risk premia associated with the higher risk of low productivity firrms. A production-based asset pricing model with aggregate and idiosyncratic shocks accounts for most of these stylized facts.

Date: 2011
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Journal Article: Firm-Level Productivity, Risk, and Return (2014)
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