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Firm Level Productivity, Risk, and Return

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Author Info

  • Ayse Imrohoroglu

    (University of Southern California)

  • Selale Tuzel

    (University of Southern California)

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    Abstract

    This paper documents a strong link between firm level total factor productivity (TFP) and several firm characteristics that are known to predict future stock returns, such as size, the book to market ratio, investment, and hiring rate. TFP is positively related to contemporaneous stock returns and negatively related to future excess returns and ex-ante discount rates. Low productivity firms on average earn a 6% annual premium over high productivity firms in the following year and the premium is countercyclical. We interpret the spread in the average returns across these portfolios as the risk premia associated with the higher risk of low productivity firrms. A production-based asset pricing model with aggregate and idiosyncratic shocks accounts for most of these stylized facts.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 21.

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    Date of creation: 2011
    Date of revision:
    Handle: RePEc:red:sed011:21

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    Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
    Fax: 1-314-444-8731
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    Web page: http://www.EconomicDynamics.org/society.htm
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    Cited by:
    1. Pablo N D’Erasmo & Hernan J Moscoso-Boedo, 2011. "Intangibles and Endogenous Firm Volatility over the Business Cycle," Virginia Economics Online Papers 400, University of Virginia, Department of Economics.
    2. Jones, Christopher S. & Tuzel, Selale, 2013. "Inventory investment and the cost of capital," Journal of Financial Economics, Elsevier, vol. 107(3), pages 557-579.
    3. Alon Brav & Wei Jiang & Hyunseob Kim, 2011. "The Real Effects of Hedge Fund Activism: Productivity, Risk, and Product Market Competition," NBER Working Papers 17517, National Bureau of Economic Research, Inc.
    4. Gârleanu, Nicolae & Kogan, Leonid & Panageas, Stavros, 2012. "Displacement risk and asset returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 491-510.

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