Does wage rigidity make firms riskier? Evidence from long-horizon return predictability

Jack Favilukis and Xiaoji Lin

Journal of Monetary Economics, 2016, vol. 78, issue C, 80-95

Abstract: The relationship between sticky wages and risk has important asset pricing implications. Like operating leverage, sticky wages are a source of risk for the firm. Firms, industries, regions, 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, this is the case in aggregate, industry, and U.S. state level data. Furthermore, this relation is stronger in industries and U.S. states with higher wage rigidity.

Keywords: Wage rigidity; Return predictability; Operating leverage (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (9)

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Working Paper: Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:78:y:2016:i:c:p:80-95

DOI: 10.1016/j.jmoneco.2016.01.003

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