Labor hiring, investment, and stock return predictability in the cross section, working paper

We show that firms with relatively lower labor hiring and physical investment rates tend to have higher future stock returns in the cross-section of US publicly traded firms, even after controlling for other known stock return predictors. In addition, the pre-dictability of the hiring and investment for stock returns varies across technologies and over time. We propose a production-based asset pricing model with adjustment costs in both labor and capital inputs to explain the empirical findings. Labor adjustment costs makes hiring decisions forward looking. Convex adjustment costs implies that the returns of firms that are investing or hiring relatively less fluctuate more closely with economic conditions. Thus the hiring and investment rates predicts stock returns in the data because these variables proxy for the firm’s time-varying conditional beta