Labor and the Market Value of the Firm

Monika Merz and Eran Yashiv ()

No 965, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: What role does labor play in firms’ market value? We explore this question using a production-based asset pricing model with frictions in the adjustment of both capital and labor. We posit that hiring of labor is akin to investment in capital and that the two interact, with the interaction being a crucial determinant of market value behavior. We use aggregate U.S. corporate sector data to estimate firms’ optimal hiring and investment decisions and the consequences for firms’ value. We then decompose this value, thereby quantifying the link between firms’ market value and gross hiring flows, employment, gross investment and physical capital. We find that a conventional specification – quadratic adjustment costs for capital and no hiring costs – performs poorly. Rather hiring and investment flows, unlike employment and capital stocks, are volatile and both are essential to account for market volatility. A key result is that firms’ value embodies the value of hiring and investment over and above the capital stock.

Keywords: gross flows; Q-model; labor market frictions; production-based asset pricing; GMM (search for similar items in EconPapers)
JEL-codes: E22 E23 E24 G12 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2003-12
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published - published in: American Economic Review, 2007, 97 (4), 1419 - 1431

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Related works:
Journal Article: Labor and the Market Value of the Firm (2007)
Working Paper: Labor and the Market Value of the Firm (2005)
Working Paper: Labor and the market value of the firm (2005)
Working Paper: Labour and the Market Value of the Firm (2004)
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