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Firm-Level Productivity, Risk, and Return

Author

Listed:
  • Ayşe İmrohoroğlu

    (Department of Finance and Business Economics, Marshall School of Business, University of Southern California, Los Angeles, California 90089)

  • Şelale Tüzel

    (Department of Finance and Business Economics, Marshall School of Business, University of Southern California, Los Angeles, California 90089)

Abstract

This paper provides new evidence about the link between firm-level total factor productivity (TFP) and stock returns. We estimate firm-level TFP and show that it is strongly related to several firm characteristics such as size, the book-to-market ratio, investment, and hiring rate. Low productivity firms earn a significant premium over high productivity firms in the following year, and this premium is countercyclical. We show that a production-based asset pricing model calibrated to match the cross section of measured firm-level TFPs can replicate the empirical relationship between TFP, many firm characteristics, and stock returns. Our results offer an explanation as to how these firm characteristics rationally predict returns. This paper was accepted by Wei Jiang, finance.

Suggested Citation

  • Ayşe İmrohoroğlu & Şelale Tüzel, 2014. "Firm-Level Productivity, Risk, and Return," Management Science, INFORMS, vol. 60(8), pages 2073-2090, August.
    • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:8:p:2073-2090
    DOI: 10.1287/mnsc.2013.1852
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