Labor Hiring, Investment, and Stock Return Predictability in the Cross Section

Frederico Belo, Xiaoji Lin and Santiago Bazdresch ()

Journal of Political Economy, 2014, vol. 122, issue 1, 129 - 177

Abstract: We study the impact of labor market frictions on asset prices. In the cross section of US firms, a 10 percentage point increase in the firm's hiring rate is associated with a 1.5 percentage point decrease in the firm's annual risk premium. We propose an investment-based model with stochastic labor adjustment costs to explain this finding. Firms with high hiring rates are expanding firms that incur high adjustment costs. If the economy experiences a shock that lowers adjustment costs, these firms benefit the most. The corresponding increase in firm value operates as a hedge against these shocks, explaining the lower risk premium of these firms in equilibrium.

Date: 2014
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Related works:
Working Paper: Labor Hiring, Investment, and Stock Return Predictability in the Cross Section (2012)
Working Paper: Labor hiring, investment and stock return predictability in the cross section (2009)
Working Paper: Labor Hiring, Investment and Stock Return Predictability in the Cross Section (2009)
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