Labor and the Market Value of the Firm

Abstract

What role does labor play in firms’ market value? We explore this question using a production-based asset pricing model with frictions in the adjustment of both capital andlabor. We posit that hiring of labor is akin to investment in capital and that the two interact, with the interaction being a crucial determinant of market value behavior.We use aggregate U.S. 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 andinvestment over and above the capital stock.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 354 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.