Working Paper: CEPR ID: DP4184
Authors: Monika Merz; Eran Yashiv
Abstract: What role does labour play in firms? market value? We explore this question using a production-based asset-pricing model with frictions in the adjustment of both capital and labor. We posit that hiring of labour is akin to investment in capital and that the two interact, with the interaction being a crucial determinant of market value behaviour. We use aggregate US corporate sector data to estimate firms? optimal hiring and investment decisions and the consequences for firms? value. We then decompose this value, thereby quantifying the link between firms? market value and gross hiring flows, employment, gross investment and physical capital. We find that a conventional specification ? quadratic adjustment costs for capital and no hiring costs ? performs poorly. Rather hiring and investment flows, unlike employment and capital stocks, are volatile and both are essential to account for market volatility. A key result is that firms? value embodies the value of hiring and investment over and above the capital stock.
Keywords: production-based asset pricing; labour market frictions; gross flows; Q-model; GMM
JEL Codes: E22; E23; E24; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hiring and investment flows (F20) | market value (D46) |
| adjustment costs for labor and capital (J30) | market value (D46) |
| hiring rates (J63) | marginal costs of investment (G31) |
| investment rates (G31) | marginal costs of hiring (M51) |
| adjustment costs for labor (J39) | market volatility (G17) |
| adjustment costs for capital (F32) | market volatility (G17) |
| hiring and investment decisions (M51) | market value (D46) |