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Firm Level Productivity, Risk, and Return

Author

Listed:
  • Ayse Imrohoroglu

    (University of Southern California)

  • Selale Tuzel

    (University of Southern California)

Abstract

This paper documents a strong link between firm level total factor productivity (TFP) and several firm characteristics that are known to predict future stock returns, such as size, the book to market ratio, investment, and hiring rate. TFP is positively related to contemporaneous stock returns and negatively related to future excess returns and ex-ante discount rates. Low productivity firms on average earn a 6% annual premium over high productivity firms in the following year and the premium is countercyclical. We interpret the spread in the average returns across these portfolios as the risk premia associated with the higher risk of low productivity firrms. A production-based asset pricing model with aggregate and idiosyncratic shocks accounts for most of these stylized facts.

Suggested Citation

  • Ayse Imrohoroglu & Selale Tuzel, 2011. "Firm Level Productivity, Risk, and Return," 2011 Meeting Papers 21, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:21
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    Cited by:

    1. Alon Brav & Wei Jiang & Hyunseob Kim, 2012. "The Real Effects of Hedge Fund Activism: Productivity, Risk, and Product Market Competition," Working Papers 12-14, Center for Economic Studies, U.S. Census Bureau.
    2. Pablo N D’Erasmo & Hernan J Moscoso-Boedo, 2011. "Intangibles and Endogenous Firm Volatility over the Business Cycle," Virginia Economics Online Papers 400, University of Virginia, Department of Economics.
    3. Alon Brav & Wei Jiang & Hyunseob Kim, 2011. "The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes," NBER Working Papers 17517, National Bureau of Economic Research, Inc.
    4. Christoph Görtz & Plutarchos Sakellaris & John D. Tsoukalas, 2017. "Financing Lumpy Adjustment," Working Papers 2017_06, Business School - Economics, University of Glasgow.

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