Journal of Financial Economics Vol. 132 No. 2 2019

The cross-section of labor leverage and equity returns

ANDRÉS DONANGELO¹; François Gourio²; Matthias Kehrig³; Miguel Palacios⁴

¹ The University of Texas at Austin · ² Federal Reserve Bank of Chicago · ³ Duke University · ⁴ University of Calgary

Abstract

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.

DOI

10.1016/j.jfineco.2018.10.016

Volume

132

Issue

2

Pages

497-518

Language

en

Sources

crossref bibtex:phds-export.bib openalex

Cite

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