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.
Original language | English (US) |
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Pages (from-to) | 129-177 |
Number of pages | 49 |
Journal | Journal of Political Economy |
Volume | 122 |
Issue number | 1 |
DOIs | |
State | Published - Feb 2014 |