The cross-section of labor leverage and equity returns

Published

Scholarly Edition

© 2018 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.

Full Text

Duke Authors

Cited Authors

  • Donangelo, A; Gourio, F; Kehrig, M; Palacios, M

Published Date

  • May 1, 2019

Start / End Page

  • 497 - 518

Digital Object Identifier (DOI)

  • 10.1016/j.jfineco.2018.10.016

Citation Source

  • Scopus