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Journal Article

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

Frederico Belo, Xiaoji Lin and Santiago Bazdresch
Journal of Political Economy
Vol. 122, No. 1 (February 2014), pp. 129-177
DOI: 10.1086/674549
Stable URL: http://www.jstor.org/stable/10.1086/674549
Page Count: 49
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Labor Hiring, Investment, and Stock Return Predictability in the Cross Section
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Abstract

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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