The Cross-Section of Labor Leverage and Equity Returns

Wednesday, May 1, 2019
Andres Donangelo, François Gourio, Matthias Kehrig, Miguel Palacios

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.

Citation: 

Andres Donangelo, François Gourio, Matthias Kehrig, and Miguel Palacios. "The Cross-Section of Labor Leverage and Equity Returns." Journal of Financial Economics Volume 132, Issue 2, May 2019, pp 497-518.

Cover of the Journal of Financial Economics