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Does Wage Rigidity Make Firms Riskier? Evidence from Long-Horizon Return Predictability

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  • Favilukis, Jack

    (London School of Economics and Political Science)

  • Lin, Xiaoji

    (OH State University)

Abstract

We explore the relationship between sticky wages and risk. Like operating leverage, sticky wages are a source of risk for the firm. Firms, industries, or times with especially high or rigid wages are especially risky. If wages are sticky then wage growth should negatively forecast future stock returns because falling wages are associated with even bigger falls in output, and increases in operating leverage. Indeed, we find this to be the case in aggregate data, and in industry data. Furthermore, we find that industries with higher wage rigidity have a more negative relationship between wages and returns.

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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 2012-19.

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Date of creation: Oct 2012
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Handle: RePEc:ecl:ohidic:2012-19

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