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Labor Hiring, Investment, and Stock Return Predictability in the Cross Section

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  • Belo, Frederico

    (University of MN)

  • Lin, Xiaoji

    (OH State University)

  • Bazdresch, Santiago

    (University of MN)

Abstract

We study the impact of labor market frictions on asset prices in the cross section of US publicly traded firms. On average, firms with low hiring rates have higher future stock returns than firms with high hiring rates, a difference of 5.2% per annum. Interpreting a hiring decision as analogous to an investment decision, we propose a dynamic neoclassical investment-based model with labor and capital adjustment costs to explain this hiring return spread. Firms that are hiring relatively more have lower macroeconomic risk which explains why high hiring rates predicts low stock returns. The model matches the observed levels of the hiring return spread, key properties of the firm-level hiring and investment rates, and other empirical regularities. Our analysis suggest that labor market frictions can have a significant impact on asset prices in financial markets.

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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2012-17.

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Date of creation: Sep 2012
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Handle: RePEc:ecl:ohidic:2012-17

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Citations

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Cited by:
  1. Marcelo Ochoa, 2013. "Volatility, labor heterogeneity and asset prices," Finance and Economics Discussion Series 2013-71, Board of Governors of the Federal Reserve System (U.S.).
  2. Chen, Long & Zhang, Lu, 2011. "Do time-varying risk premiums explain labor market performance?," Journal of Financial Economics, Elsevier, vol. 99(2), pages 385-399, February.
  3. Yashiv, Eran, 2011. "The Joint Behavior of Hiring and Investment," CEPR Discussion Papers 8237, C.E.P.R. Discussion Papers.
  4. Lars-Alexander Kuehn & Nicolas Petrosky-Nadeau & Lu Zhang, 2012. "An Equilibrium Asset Pricing Model with Labor Market Search," NBER Working Papers 17742, National Bureau of Economic Research, Inc.
  5. Lu Zhang & Howard Kung & Hang Bai, 2013. ""Shooting" the CAPM," 2013 Meeting Papers 905, Society for Economic Dynamics.
  6. Frederico Belo & Chen Xue & Lu Zhang, 2010. "Cross-sectional Tobin's Q," NBER Working Papers 16336, National Bureau of Economic Research, Inc.
  7. Hanno Lustig & Chad Syverson & Stijn Van Nieuwerburgh, 2009. "Technological Change and the Growing Inequality in Managerial Compensation," NBER Working Papers 14661, National Bureau of Economic Research, Inc.
  8. Lin, Xiaoji, 2012. "Endogenous technological progress and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 103(2), pages 411-427.
  9. Yashiv, Eran, 2012. "Frictions and the Joint Behavior of Hiring and Investment," IZA Discussion Papers 6636, Institute for the Study of Labor (IZA).
  10. Francois Gourio, 2007. "Putty-Clay Technology And Stock Market Volatility," Boston University - Department of Economics - Working Papers Series WP2007-005, Boston University - Department of Economics.
  11. Belo, Frederico & Lin, Xiaoji & Vitorino, Maria Ana, 2013. "Brand Capital and Firm Value," Working Paper Series 2013-04, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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