The cross-section of labor leverage and equity returns

The relative size and inflexibility of labor expenses lead to a form of operating leverage, which we call labor leverage. We derive a set of conditions for the existence of labor leverage even when labor markets are frictionless. Our model provides theoretical support for the use of firm-level labor...

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Bibliographic Details
Published in:Journal of financial economics 2019-05, Vol.132 (2), p.497-518
Main Authors: Donangelo, Andres, Gourio, François, Kehrig, Matthias, Palacios, Miguel
Format: Article
Language:English
Subjects:
Capital-labor complementarity
Censuses
Economics
Expected returns
Labor leverage
Labor market
Labor share
Leverage
Operating leverage
Profits
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Summary:The relative size and inflexibility of labor expenses lead to a form of operating leverage, which we call labor leverage. We derive a set of conditions for the existence of labor leverage even when labor markets are frictionless. Our model provides theoretical support for the use of firm-level labor share as a measure of labor leverage. Using Compustat/CRSP and confidential Census data, we provide evidence for the existence and for the economic significance of labor leverage: high labor share firms have operating profits that are more sensitive to economic shocks and have higher expected returns.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2018.10.016