What Drives Firms’ Hiring Decisions? An Asset Pricing Perspective

Abstract

We document that the aggregate hiring rate of publicly traded firms in the U.S. economy negatively predicts stock market returns and long-term cash flows, and positively predicts short-term cash flows. In addition, through a variance decomposition, we show that the time-series variation in the aggregate hiring rate is mainly driven by changes in discount rates and short-term expected cash flows, with no contribution from variation in long-term expected cash flows. We estimate a neoclassical dynamic model with labor market frictions and show that labor adjustment costs and time-varying risk are essential for the model to replicate the empirical patterns.

Does Main Street Benefit from What Benefits Wall Street?

“…A shock to the aggregate discount rate will affect the returns on physical and human capital in the same direction. Even though the most basic asset-pricing model illustrates how a fall in the discount rate increases stock prices, recent work by Hall (2017) and Belo, Donangelo, Lin, and Luo (2022) has demonstrated theoretically and empirically that a fall in the discount rate also increases employment when labor markets have search frictions. Chen and Zhang (2011) also study the relationship between discount rates and the labor market in a model with search frictions and find contrasting effects of a fall in the discount rate in the short run and the long run.…”