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Firm Level Productivity, Risk, and Return

  • Ayse Imrohoroglu

    (University of Southern California)

  • Selale Tuzel

    (University of Southern California)

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.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 21.

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Date of creation: 2011
Date of revision:
Handle: RePEc:red:sed011:21
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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