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The cross-section of labor leverage and equity returns

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  • Donangelo, Andres
  • Gourio, François
  • Kehrig, Matthias
  • Palacios, Miguel

Abstract

The relative size and inflexibility of labor expenses lead to a form of operating leverage, which we call labor leverage. We derive a set of conditions for the existence of labor leverage even when labor markets are frictionless. Our model provides theoretical support for the use of firm-level labor share as a measure of labor leverage. Using Compustat/CRSP and confidential Census data, we provide evidence for the existence and for the economic significance of labor leverage: high labor share firms have operating profits that are more sensitive to economic shocks and have higher expected returns.

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  • Donangelo, Andres & Gourio, François & Kehrig, Matthias & Palacios, Miguel, 2019. "The cross-section of labor leverage and equity returns," Journal of Financial Economics, Elsevier, vol. 132(2), pages 497-518.
    • Handle: RePEc:eee:jfinec:v:132:y:2019:i:2:p:497-518
    DOI: 10.1016/j.jfineco.2018.10.016
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    More about this item

    Keywords

    Labor leverage; Labor share; Operating leverage; Expected returns; Capital-labor complementarity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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