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Labor hiring, investment and stock return predictability in the cross section

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  • Santiago Bazdrech
  • Frederico Belo
  • Xiaoji Lin

Abstract

We document that the firm level hiring rate predicts stock returns in the cross-section of US publicly traded firms even after controlling for investment, size, book-to-market and momentum as well as other known predictors of stock returns. The predictability shows up in both Fama-MacBeth cross sectional regressions and in portfolio sorts and it is robust to the exclusion of micro cap firms from the sample. We propose a production-based asset pricing model with adjustment costs in labor and capital that replicates the main empirical findings well. Labor adjustment costs makes hiring decisions forward looking in nature and thus informative about the firms’ expectations about future cash-flows and risk-adjusted discount rates. The model implies that the investment rate and the hiring rate predicts stock returns because these variables proxy for the firm’s time-varying conditional beta.

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File URL: http://eprints.lse.ac.uk/24418/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24418.

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Length: 52 pages
Date of creation: 12 Nov 2008
Date of revision:
Handle: RePEc:ehl:lserod:24418

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Keywords: Labor Hiring; Investment; Stock Return Predictability; Cross-Sectional Asset Pricing; Production-Based Asset Pricing;

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References

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Citations

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Cited by:
  1. Sylvain, Serginio, 2014. "Does Human Capital Risk Explain The Value Premium Puzzle?," MPRA Paper 54551, University Library of Munich, Germany.
  2. Lin, Xiaoji, 2012. "Endogenous Technological Progress and the Cross Section of Stock Returns," Working Paper Series 2012-22, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  3. Gourio, François, 2011. "Putty-clay technology and stock market volatility," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 117-131, March.
  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. 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.
  6. Yashiv, Eran, 2012. "Frictions and the Joint Behavior of Hiring and Investment," IZA Discussion Papers 6636, Institute for the Study of Labor (IZA).
  7. Frederico Belo & Xiaoji Lin & Maria Ana Vitorino, 2014. "Brand Capital and Firm Value," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 150-169, January.
  8. 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.).
  9. Frederico Belo & Xiaoji Lin & Fan Yang, 2014. "External Equity Financing Shocks, Financial Flows, and Asset Prices," NBER Working Papers 20210, National Bureau of Economic Research, Inc.
  10. 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.
  11. Frederico Belo & Chen Xue & Lu Zhang, 2010. "Cross-sectional Tobin's Q," NBER Working Papers 16336, National Bureau of Economic Research, Inc.
  12. Yashiv, Eran, 2011. "The Joint Behavior of Hiring and Investment," CEPR Discussion Papers 8237, C.E.P.R. Discussion Papers.
  13. Lu Zhang & Howard Kung & Hang Bai, 2013. ""Shooting" the CAPM," 2013 Meeting Papers 905, Society for Economic Dynamics.

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