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Does wage rigidity make firms riskier? Evidence from long-horizon return predictability

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  • Favilukis, Jack
  • Lin, Xiaoji

Abstract

The relationship between sticky wages and risk has important asset pricing implications. Like operating leverage, sticky wages are a source of risk for the firm. Firms, industries, regions, 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, this is the case in aggregate, industry, and U.S. state level data. Furthermore, this relation is stronger in industries and U.S. states with higher wage rigidity.

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  • Favilukis, Jack & Lin, Xiaoji, 2016. "Does wage rigidity make firms riskier? Evidence from long-horizon return predictability," Journal of Monetary Economics, Elsevier, vol. 78(C), pages 80-95.
    • Handle: RePEc:eee:moneco:v:78:y:2016:i:c:p:80-95
    DOI: 10.1016/j.jmoneco.2016.01.003
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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. Liang, H. & Renneboog, Luc & Vansteenkiste, Cara, 2017. "Corporate Employee-Engagement and Merger Outcomes," Other publications TiSEM ab3f7a1d-a202-48b7-9c75-1, Tilburg University, School of Economics and Management.
    3. Guo, Hui & Jiang, Xiaowen, 2021. "Aggregate Distress Risk and Equity Returns," Journal of Banking & Finance, Elsevier, vol. 133(C).
    4. Rong, Yuen & Tian, Cunzhi & Li, Lifang & Zheng, Xinwei, 2020. "Labor hiring and stock return: A model and new evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    5. Che, Yi & Li, Xuchao & Zhang, Yan & Zhao, Lin, 2024. "Labor protection and firms’ risk-taking behavior: evidence from China’s New Labor Contract Law," Journal of Asian Economics, Elsevier, vol. 91(C).
    6. de Ridder, M. & Pfajfar, D., 2017. "Policy Shocks and Wage Rigidities: Empirical Evidence from Regional Effects of National Shocks," Cambridge Working Papers in Economics 1717, Faculty of Economics, University of Cambridge.
    7. Bae, Jaewan & Kang, Jangkoo, 2024. "Asset pricing implications of firms' profit sharing," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
    8. Xiaolan Zhang, 2014. "Who Bears Firm-Level Risk? Implications for Cash Flow Volatility," 2014 Meeting Papers 184, Society for Economic Dynamics.
    9. Gintautas Radvila & Violeta Šilingienė, 2020. "Designing Remuneration Systems of Organizations for Sustainable HRM: The Core Characteristics of an Emerging Field," International Journal of Human Resource Studies, Macrothink Institute, vol. 10(2), pages 252279-2522, December.

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    More about this item

    Keywords

    Wage rigidity; Return predictability; Operating leverage;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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