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Product Market Competition, Labor Mobility, and the Cross-Section of Stock Returns

Author

Listed:
  • Shamim Ahmed
  • Ziwen Bu
  • Xiaoxia Ye
  • Hui Chen

Abstract

This paper explores the impact of product market competition on the positive relation between labor mobility (LM) and future returns. We develop a production-based model and formalize the intuition that low exposure to systematic risk in a concentrated industry limits LM’s amplifying effect on operating leverage. Therefore, the model predicts a stronger positive relation between LM and expected returns for firms in competitive industries. Consistent with the model’s prediction, we empirically find that LM predicts returns only among firms in competitive industries. This evidence suggests that the intensity of competition in firms’ product market potentially drives the positive LM-return relation. (JEL G12, G14, J69)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Shamim Ahmed & Ziwen Bu & Xiaoxia Ye & Hui Chen, 2023. "Product Market Competition, Labor Mobility, and the Cross-Section of Stock Returns," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 13(3), pages 440-480.
    • Handle: RePEc:oup:rasset:v:13:y:2023:i:3:p:440-480.
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    References listed on IDEAS

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    1. Frederico Belo & Xiaoji Lin & Santiago Bazdresch, 2014. "Labor Hiring, Investment, and Stock Return Predictability in the Cross Section," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 129-177.
    2. M. Cecilia Bustamante & Andres Donangelo, 2017. "Product Market Competition and Industry Returns," The Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4216-4266.
    3. Frederico Belo & Jun Li & Xiaoji Lin & Xiaofei Zhao, 2017. "Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor," The Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3669-3709.
    4. Jonathan B. Berk & Richard C. Green & Vasant Naik, 1999. "Optimal Investment, Growth Options, and Security Returns," Journal of Finance, American Finance Association, vol. 54(5), pages 1553-1607, October.
    5. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    6. Felipe L. Aguerrevere, 2009. "Real Options, Product Market Competition, and Asset Returns," Journal of Finance, American Finance Association, vol. 64(2), pages 957-983, April.
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • J69 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Other

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