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The cross-section of labor leverage and equity returns

Andres Donangelo, Francois Gourio (), Matthias Kehrig and Miguel Palacios

Journal of Financial Economics, 2019, vol. 132, issue 2, 497-518

Abstract: The relative size and inflexibility of labor expenses lead to a form of operating leverage, which we call labor leverage. We derive a set of conditions for the existence of labor leverage even when labor markets are frictionless. Our model provides theoretical support for the use of firm-level labor share as a measure of labor leverage. Using Compustat/CRSP and confidential Census data, we provide evidence for the existence and for the economic significance of labor leverage: high labor share firms have operating profits that are more sensitive to economic shocks and have higher expected returns.

Keywords: Labor leverage; Labor share; Operating leverage; Expected returns; Capital-labor complementarity (search for similar items in EconPapers)
JEL-codes: G12 E23 J23 (search for similar items in EconPapers)
Date: 2019
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Related works:
Working Paper: The Cross-Section of Labor Leverage and Equity Returns* (2017) Downloads
Working Paper: The Cross-Section of Labor Leverage and Equity Returns (2017) Downloads
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