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Does firm-level productivity predict stock returns?

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  • Hiroki, Takashi
  • Iwatsubo, Kentaro
  • Watkins, Clinton

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.

Suggested Citation

  • Hiroki, Takashi & Iwatsubo, Kentaro & Watkins, Clinton, 2022. "Does firm-level productivity predict stock returns?," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:pacfin:v:72:y:2022:i:c:s0927538x22000051
    DOI: 10.1016/j.pacfin.2022.101710
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    More about this item

    Keywords

    Firm-level productivity; Total factor productivity (TFP); Cross-section of returns; Intangibles; Research and development (R&D); Organizational capital;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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