I show that industry adjusted labor intensity is positively related to expected returns for firms in the
manufacturing industry. Labor is one the most important factor of productions for a firm. When a negative
shock hits the economy, revenues fall. However, labor costs do not fall as much as revenues. On average at
the firm level, revenues are more procyclical than labor costs and labor costs are less procyclical than capital
expenditures. Therefore, firms with relatively high labor intensity are more vulnerable to the business cycle
than those with less labor intensity. I also show that firms with higher labor intensity have higher cash flow
sensitivity to the aggregate shocks. This result supports the operating leverage mechanism behind the labor
intensity and return relationship.
Journal Section | ARTICLES |
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Authors | |
Publication Date | January 6, 2016 |
Submission Date | January 10, 2017 |
Acceptance Date | June 30, 2016 |
Published in Issue | Year 2015 Volume: 3 Issue: 1 |