A Labor Capital Asset Pricing Model

Abstract

We show that labor search frictions are an important determinant of the cross-section of equity returns. In the data, sorting firms by loadings on labor market tightness, the key statistic of search models, generates a spread in future returns of 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make optimal employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time variation in the efficiency of the matching technology. Firms with low loadings are not hedged against adverse matching efficiency shocks and require higher expected stock returns.

Labor‐Technology Substitution: Implications for Asset Pricing

“…My findings also contribute to a growing literature on labor heterogeneity and the cross‐section of stock returns (see Gourio (), Chen, Kacperczyk, and Ortiz‐Molina (), Kuehn, Simutin, and Wang (), and Tuzel and Zhang (), among others). Eisfeldt and Papanikolaou () and Donangelo () derive firm risk by connecting employees' outside options to priced technology frontier shocks and to aggregate economic shocks, respectively.…”

The cross-section of labor leverage and equity returns

“…6 Other papers that relate labor to finance issues are Peterson (1994); Santos and Veronesi (2006); Merz and Yashiv (2007); Chen and Zhang (2011); Chen et al (2012); Eisfeldt and Papanikolaou (2013); Petrosky-Nadeau, Zhang, and Kuehn (2013); Kuehn, Simutin, and Wang (2014); Schmidt (2014); Favilukis, Lin, and Zhao (2015); and Favilukis and Lin (2016).…”

Asset Pricing Implications of Hiring Demographics

“…Ochoa (2013) also argues for costlier adjustment for skilled labor and studies the relation between volatility risk and labor frictions. Kuehn, Simutin, and Wang (2014) show that firms have differential exposures to fluctuations in the aggregate matching efficiency in the labor market contributing to explanations of cross-sectional stock return spreads. Donangelo (2014) studies the impact of labor mobility on asset prices, while Zhang (2015) focuses on the implications of labor-saving technologies for asset prices.…”