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Automation and the displacement of labor by capital: Asset pricing theory and empirical evidence

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  • Knesl, Jiří

Abstract

I examine the asset pricing implications of technological innovations that allow capital to displace labor: automation. I develop a theory in which firms with displaceable labor are negatively exposed to such technology shocks. In the model, firms optimally adopt technology to gain competitive advantage but in equilibrium competition erodes profits and decreases firm value. Empirically, I find that firms with high share of displaceable labor have negative exposure to technology shocks. A long-short portfolio sorted on this variable mimics macroeconomic measures of technology shocks. Negatively exposed firms earn a 4% annual return premium consistent with displacement risk from technological progress.

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  • Knesl, Jiří, 2023. "Automation and the displacement of labor by capital: Asset pricing theory and empirical evidence," Journal of Financial Economics, Elsevier, vol. 147(2), pages 271-296.
    • Handle: RePEc:eee:jfinec:v:147:y:2023:i:2:p:271-296
    DOI: 10.1016/j.jfineco.2022.11.003
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    More about this item

    Keywords

    Automation; Technology shock; Technology adoption; Stock returns; Displacement; Risk premium;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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