Labor hiring, investment and stock return predictability in the cross section

Santiago Bazdrech, Frederico Belo and Xiaoji Lin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We document that the firm level hiring rate predicts stock returns in the cross-section of US publicly traded firms even after controlling for investment, size, book-to-market and momentum as well as other known predictors of stock returns. The predictability shows up in both Fama-MacBeth cross sectional regressions and in portfolio sorts and it is robust to the exclusion of micro cap firms from the sample. We propose a production-based asset pricing model with adjustment costs in labor and capital that replicates the main empirical findings well. Labor adjustment costs makes hiring decisions forward looking in nature and thus informative about the firms’ expectations about future cash-flows and risk-adjusted discount rates. The model implies that the investment rate and the hiring rate predicts stock returns because these variables proxy for the firm’s time-varying conditional beta.

Keywords: labor hiring; investment; stock return predictability; cross-sectional asset pricing; Production-Based Asset Pricing (search for similar items in EconPapers)
JEL-codes: E22 E23 E44 G12 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2009-03-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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http://eprints.lse.ac.uk/24418/ Open access version. (application/pdf)

Related works:
Journal Article: Labor Hiring, Investment, and Stock Return Predictability in the Cross Section (2014)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24418

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