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Labor‐Technology Substitution: Implications for Asset Pricing

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  • MIAO BEN ZHANG

Abstract

This paper studies the asset pricing implications of a firm's opportunities to replace routine‐task labor with automation. I develop a model in which firms optimally undertake such replacement when their productivity is low. Hence, firms with routine‐task labor maintain a replacement option that hedges their value against unfavorable macroeconomic shocks and lowers their expected returns. Using establishment‐level occupational data, I construct a measure of firms' share of routine‐task labor. Compared to their industry peers, firms with a higher share of routine‐task labor (i) invest more in machines and reduce more routine‐task labor during economic downturns, and (ii) have lower expected stock returns.

Suggested Citation

  • Miao Ben Zhang, 2019. "Labor‐Technology Substitution: Implications for Asset Pricing," Journal of Finance, American Finance Association, vol. 74(4), pages 1793-1839, August.
  • Handle: RePEc:bla:jfinan:v:74:y:2019:i:4:p:1793-1839
    DOI: 10.1111/jofi.12766
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    Cited by:

    1. Makridis, Christos & Rossi, Alberto, 2020. "Rise of the "Quants" in Financial Services: Regulation and Crowding Out of Routine Jobs," Working Papers 10026, George Mason University, Mercatus Center.

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