The Cross-Section of Labor Leverage and Equity Returns

Donangelo, Andres, Francois Gourio, Matthias Kehrig, and Miguel Palacios. "The cross-section of labor leverage and equity returns." Journal of Financial Economics 132, no. 2 (2019): 497-518

DOI: 10.1016/j.jfineco.2018.10.016

53 Pages Posted: 13 May 2016 Last revised: 29 Jun 2019

See all articles by Andres Donangelo

Andres Donangelo

University of Texas at Austin - Department of Finance

Francois Gourio

Federal Reserve Bank of Chicago

Matthias Kehrig

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Miguel Palacios

Haskayne School of Business, University of Calgary

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2016

Abstract

Using a standard production model, we demonstrate theoretically that, even if labor is fully flexible, it generates a form of operating leverage if (a) wages are smoother than productivity and (b) the capital-labor elasticity of substitution is strictly less than one. Our model supports using labor share -- the ratio of labor expenses to value added -- as a proxy for labor leverage. We show evidence for conditions (a) and (b), and we demonstrate the economic significance of labor leverage: High labor-share firms have operating profits that are more sensitive to shocks, and they have higher expected asset returns.

Keywords: Labor Leverage, Capital-Labor Complementarity, Capital-Labor Elasticity of Substitution, Operating Leverage, Labor Share, Expected Returns

JEL Classification: G12, J2, J3

Suggested Citation

Donangelo, Andres and Gourio, Francois and Kehrig, Matthias and Palacios, Miguel, The Cross-Section of Labor Leverage and Equity Returns (September 1, 2016). Donangelo, Andres, Francois Gourio, Matthias Kehrig, and Miguel Palacios. "The cross-section of labor leverage and equity returns." Journal of Financial Economics 132, no. 2 (2019): 497-518 , DOI: 10.1016/j.jfineco.2018.10.016, Available at SSRN: https://ssrn.com/abstract=2778797 or http://dx.doi.org/10.2139/ssrn.2778797

Andres Donangelo (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/donangelo/

Francois Gourio

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/fgourio

Matthias Kehrig

Duke University ( email )

237 Social Sciences
Box 90097
Durham, NC 27708-0097
United States

HOME PAGE: http://sites.google.com/site/matthiaskehrig/research

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Miguel Palacios

Haskayne School of Business, University of Calgary ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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