Labor Unions and Asset Prices

University of Aarhus Economics Working Paper No. 2007-5

27 Pages Posted: 6 Mar 2007

See all articles by William Addessi

William Addessi

University of Rome

Francesco Busato

Aarhus University - School of Business and Social Sciences

Date Written: November 5, 2007

Abstract

The paper investigates the nexus between labor and financial markets, focusing on the interaction between labor union behavior in setting wages, firms' investment strategy and asset prices. The way unions set wage claims after observing firm's financial performance increases the volatility of firms' returns and the riskiness of corporate ownership. To remunerate this higher volatility and stronger risk, firms' equities have to grant high return. This mechanism is able to offer an explanation of for the "equity puzzle", that is it can explain the difference between equity returns and the risk free rate. It is a welcome result that the simulated excess return is about the empirical estimate and this result is obtained with a logarithmic specification of the shareholders preferences.

Keywords: Equity Premium, General Equilibrium, Union Models

JEL Classification: D81, E24, J23

Suggested Citation

Addessi, William and Busato, Francesco, Labor Unions and Asset Prices (November 5, 2007). University of Aarhus Economics Working Paper No. 2007-5, Available at SSRN: https://ssrn.com/abstract=968193 or http://dx.doi.org/10.2139/ssrn.968193

William Addessi (Contact Author)

University of Rome ( email )

Via del Castro Laurenziano 9
Rome, 00161
Italy

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

Francesco Busato

Aarhus University - School of Business and Social Sciences ( email )

Building 350
DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

HOME PAGE: http://www.econ.au.dk/afn

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