Journal of Finance, 72 (5), 2017, 2131-2178
We show that labor search frictions are an important determinant of the cross-section of equity returns. Empirically, we find that firms with low loadings on labor market tightness outperform firms with high loadings by 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make dynamic employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time-variation in the efficiency of the aggregate matching technology. Firms with low loadings are more exposed to adverse matching efficiency shocks and require higher expected stock returns.
Best Paper Award at the 2013 ASU Sonoran Winter Finance Conference
WRDS Outstanding Paper Award in Asset Pricing at the 2013 Midwest Finance Association Meeting