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Labor hiring, investment and stock return predictability in the cross section

Bazdrech, Santiago, Belo, Frederico and Lin, Xiaoji (2008) Labor hiring, investment and stock return predictability in the cross section. Discussion paper, 628. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

We document that the firm level hiring rate predicts stock returns in the cross-section of US publicly traded firms even after controlling for investment, size, book-to-market and momentum as well as other known predictors of stock returns. The predictability shows up in both Fama-MacBeth cross sectional regressions and in portfolio sorts and it is robust to the exclusion of micro cap firms from the sample. We propose a production-based asset pricing model with adjustment costs in labor and capital that replicates the main empirical findings well. Labor adjustment costs makes hiring decisions forward looking in nature and thus informative about the firms’ expectations about future cash-flows and risk-adjusted discount rates. The model implies that the investment rate and the hiring rate predicts stock returns because these variables proxy for the firm’s time-varying conditional beta.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2008 The Authors
Library of Congress subject classification: H Social Sciences > HG Finance
Journal of Economic Literature Classification System: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E23 - Production
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Finance
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 628
Date Deposited: 10 Jul 2009 13:49
URL: http://eprints.lse.ac.uk/24418/

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