Abstract
We show that labor search frictions are an important determinant of the cross-section of equity returns. Empirically, we find that firms with low loadings on labor market tightness outperform firms with high loadings by 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make dynamic employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time-variation in the efficiency of the aggregate matching technology. Firms with low loadings are more exposed to adverse matching efficiency shocks and require higher expected stock returns.
Original language | English (US) |
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Pages (from-to) | 2131-2178 |
Number of pages | 48 |
Journal | Journal of Finance |
Volume | 72 |
Issue number | 5 |
DOIs | |
State | Published - Oct 2017 |
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics