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Title: Labor Adjustment Cost: Implications from Asset Prices

Citation Type: Working Paper

Publication Year: 2021

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Abstract: Hours growth is negatively related to future equity returns. At the firm-level, a 1 percent increase in hours predicts a 0.6 percent decrease in future equity return. At the portfolio-level, the quintile low-minus-high spread yields a 7-percent annual risk premium. A production-based asset pricing model rationalizes this negative relation with adjustment cost on hours and adjustment cost shock. A positive adjustment cost shock lowers adjustment cost in the economy and redistributes output from consumption to investment. Firms adjusting hours take advantage of the positive adjustment cost shock and pay out more consumption when marginal utility is high. Therefore, these firms are less risky, explaining low equity returns in equilibrium. Structural estimation matches real quantity moments and equity return predictability. Consistent with the model, the adjustment cost shock recovered from the data is an aggregate shock in the business cycles and a systematic risk in the crosssections, affecting a firm’s cash flow and equity return via its hours choice.

Url: https://dongweix.github.io/archive/dongweixu_jobmarketpaper.pdf

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Authors: Xu, Dongwei

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Institution: Boston University

Pages: 1-120

Publisher Location: Boston

Data Collections: IPUMS USA, IPUMS CPS

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