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Labor Hiring, Investment, and Stock Return Predictability in the Cross Section

  • Frederico Belo
  • Xiaoji Lin
  • Santiago Bazdresch

We study the impact of labor market frictions on asset prices. In the cross section of US firms, a 10 percentage point increase in the firm’s hiring rate is associated with a 1.5 percentage point decrease in the firm’s annual risk premium. We propose an investment-based model with stochastic labor adjustment costs to explain this finding. Firms with high hiring rates are expanding firms that incur high adjustment costs. If the economy experiences a shock that lowers adjustment costs, these firms benefit the most. The corresponding increase in firm value operates as a hedge against these shocks, explaining the lower risk premium of these firms in equilibrium.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/674549
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File URL: http://www.jstor.org/stable/full/10.1086/674549
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 122 (2014)
Issue (Month): 1 ()
Pages: 129 - 177

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Handle: RePEc:ucp:jpolec:doi:10.1086/674549
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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