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The cross‐sectional return predictability of employment growth: A liquidity risk explanation

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  • Weimin Liu
  • Di Luo
  • Seyoung Park
  • Huainan Zhao

Abstract

Employment growth (EG) is related to liquidity fundamentals of investment opportunities, firm health, and information environment and quality. This, in turn, implies that liquidity risk may play a role in explaining the relation between EG and stock returns. We find strong empirical evidence supporting the link between EG and liquidity risk. Stocks of high‐EG firms are more liquid and exposed to lower liquidity risk than stocks of low‐EG firms. After adjusting for liquidity risk, EG loses its power to predict returns.

Suggested Citation

  • Weimin Liu & Di Luo & Seyoung Park & Huainan Zhao, 2022. "The cross‐sectional return predictability of employment growth: A liquidity risk explanation," The Financial Review, Eastern Finance Association, vol. 57(1), pages 155-178, February.
    • Handle: RePEc:bla:finrev:v:57:y:2022:i:1:p:155-178
    DOI: 10.1111/fire.12279
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