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Labor and the Market Value of the Firm

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  • Merz, Monika

    () (University of Vienna)

  • Yashiv, Eran

    () (Tel Aviv University)

Abstract

What role does labor play in firms’ market value? We explore this question using a production-based asset pricing model with frictions in the adjustment of both capital and labor. We posit that hiring of labor is akin to investment in capital and that the two interact, with the interaction being a crucial determinant of market value behavior. We use aggregate U.S. corporate sector data to estimate firms’ optimal hiring and investment decisions and the consequences for firms’ value. We then decompose this value, thereby quantifying the link between firms’ market value and gross hiring flows, employment, gross investment and physical capital. We find that a conventional specification – quadratic adjustment costs for capital and no hiring costs – performs poorly. Rather hiring and investment flows, unlike employment and capital stocks, are volatile and both are essential to account for market volatility. A key result is that firms’ value embodies the value of hiring and investment over and above the capital stock.

Suggested Citation

  • Merz, Monika & Yashiv, Eran, 2003. "Labor and the Market Value of the Firm," IZA Discussion Papers 965, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp965
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    References listed on IDEAS

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    More about this item

    Keywords

    gross flows; Q-model; labor market frictions; production-based asset pricing; GMM;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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