This paper studies how expected returns interact with product market competition. The model predicts that (1) competition erodes markups, such that firms are more exposed to systematic risk; (2) the threat of entry by new firms lowers exposure to systematic risk of incumbents; and (3) higher industry aggregate risk represents a barrier to entry, such that riskier industries become less competitive. We provide empirical evidence consistent with these three channels and for an overall negative relation between returns and competition. We also consider a sample selection correction for publicly listed firms and use it to construct an alternative concentration measure.

This paper quantifies the relative importance of labor-induced operating leverage at explaining the value premium. I extend a traditional variance decomposition methodology using labor shares to disentangle labor leverage from the value premium and from the value spread and from the variation in profitability levels and growth. My extended decomposition shows that labor leverage explains approximately 50% of the value premium, whereas profitability and growth-based mechanisms explain the other 50%. I propose a tractable production-based asset-pricing model that qualitatively and quantitatively explains this finding, as well as the relation between book-to-market ratios, discount rates, profitability, and future growth.

This paper shows that product market competition has two opposing effects on asset returns. The first relates to the pro-cyclical nature of the value destruction from expansion of competitors, which lowers exposure to systematic risk in more competitive industries. The second is related to the narrower profit margins due to competition, which increase exposure to systematic risk. We find that the first effect dominates the second, so that firms in more competitive industries generally earn lower asset returns. Our results are robust to using five alternative measures of competition and to controlling for the sample selection bias of publicly-listed firms.

We document that the aggregate hiring rate of publicly traded firms in the U.S. economy negatively predicts stock market returns and long-term cash flows, and positively predicts short-term cash flows. In addition, through a variance decomposition, we show that the time-series variation in the aggregate hiring rate is mainly driven by changes in discount rates and short-term expected cash flows, with no contribution from variation in long-term expected cash flows. We estimate a neoclassical dynamic model with labor market frictions and show that labor adjustment costs and time-varying risk are essential for the model to replicate the empirical patterns.