Displacement of labor by capital: Its implication on stock liquidity

Jang‐Chul Kim, Sharif Mazumder and Qing Su

International Review of Finance, 2025, vol. 25, issue 2

Abstract: This study investigates the impact of firms' potential to automate routine‐task labor on stock liquidity. We demonstrate that firms with a high potential for automation (AP), characterized by a significant share of displaceable labor, experience a decline in stock liquidity. Our analysis shows that this association is particularly pronounced during positive technological shocks and heightened product market competition. Using the catastrophic 2011 Thai flooding as an exogenous shock to AP, we find evidence that the relationship between AP and liquidity is likely causal. The findings withstand rigorous testing, encompassing industry‐level analysis, propensity score matching, and the utilization of alternative proxies for both displaceable labor and stock liquidity. This examination is augmented by the inclusion of additional control variables. These results contribute to a deeper understanding of the interplay between automation, market dynamics, and liquidity, offering valuable insights for investors, policymakers, and firms navigating the evolving technological innovation landscape.

Date: 2025
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