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The Cross-Section of Labor Leverage and Equity Returns

Publication ,  Scholarly Edition
Kehrig, M; Donangelo, A; Gourio, F; Palacios, M
September 2016

Using a standard production model, we demonstrate theoretically that, even if labor is fully flexible, it generates a form of operating leverage if (a) wages are smoother than productivity and (b) the capital-labor elasticity of substitution is strictly less than one. Our model supports using labor share -- the ratio of labor expenses to value added -- as a proxy for labor leverage. We show evidence for conditions (a) and (b), and we demonstrate the economic significance of labor leverage: High labor-share firms have operating profits that are more sensitive to shocks, and they have higher expected asset returns.

Duke Scholars

Publication Date

September 2016

Related Subject Headings

  • Finance
  • 3801 Applied economics
  • 3502 Banking, finance and investment
  • 1606 Political Science
  • 1502 Banking, Finance and Investment
  • 1402 Applied Economics
 

Citation

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Kehrig, M., Donangelo, A., Gourio, F., & Palacios, M. (2016). The Cross-Section of Labor Leverage and Equity Returns.
Kehrig, M., A. Donangelo, F. Gourio, and M. Palacios. “The Cross-Section of Labor Leverage and Equity Returns,” September 2016.
Kehrig M, Donangelo A, Gourio F, Palacios M. The Cross-Section of Labor Leverage and Equity Returns. 2016.
Kehrig M, Donangelo A, Gourio F, Palacios M. The Cross-Section of Labor Leverage and Equity Returns. 2016.

Publication Date

September 2016

Related Subject Headings

  • Finance
  • 3801 Applied economics
  • 3502 Banking, finance and investment
  • 1606 Political Science
  • 1502 Banking, Finance and Investment
  • 1402 Applied Economics