Does firm-level productivity predict stock returns?

Takashi Hiroki, Kentaro Iwatsubo and Clinton Watkins

Pacific-Basin Finance Journal, 2022, vol. 72, issue C

Abstract: Contrary to the findings of previous U.S. studies, we show that the firm-level total factor productivity (TFP) of Japanese manufacturers positively predicts their future stock returns in the cross-section when controlling for relevant risk factors, including those of Fama and French (2015). Risks related to intangible expenditure, primarily those for research and development (R&D) and personnel, explain a substantial fraction of the predictive power of firm-level TFP, while bankruptcy, macroeconomic, and capital expenditure risks do not. More productive firms trade at a significant premium to less productive firms. This premium compensates investors for risks associated with innovation and human and organizational capital formation.

Keywords: Firm-level productivity; Total factor productivity (TFP); Cross-section of returns; Intangibles; Research and development (R&D); Organizational capital (search for similar items in EconPapers)
JEL-codes: D24 G12 G14 G17 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:72:y:2022:i:c:s0927538x22000051

DOI: 10.1016/j.pacfin.2022.101710

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