Labor and the Market Value of the Firm

By M. Merz, Eran Yashiv. Social Science Research Network, 2007

358 citations recorded by the source corpus.

What role does labor play in a firm’s market value? We explore this question using a production-based asset pricing model with frictions in the adjustment of both capital and labor. 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 the time series behavior of market value. We use aggregate U.S. corporate sector data to estimate firms' optimal hiring and investment decisions and the consequences for firms' value. The model generates a good fit of the data. We decompose the estimated market value, thereby quantifying the link between firms' value and gross hiring flows, employment, gross investment flows, and physical capital. We find that a conventional specification -- quadratic adjustment costs for capital and no hiring costs -- performs poorly. Hiring and investment flows, unlike employment and capital stocks, are volatile and both are essential to account for market value volatility. A key result is that firms' value embodies the value of hiring and investment over and above the capital stock.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/492e0e71e8679f2a96a28da3a78e3543e0fcf898

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Citations in the corpus

Inflation Dynamics with Search Frictions: A Structural Econometric Analysis (2008, methodology): “where cp1, and c 1⁄4 1 corresponds to the linear case discussed by Pissarides (2000). Crucially, Rotemberg assumes that the hiring costs are incurred one period later, and that aggregate conditions in t þ 1 are observed at the end of period t, before vacancies are chosen.”
Does stock price informativeness affect labor investment efficiency (2016, result): “6 non-labor investment and labor investment, suggesting that our findings are not driven by nonlabor investments, consistent with the findings of prior studies (e.g., Benmelech et al., 2011; Merz and Yashiv, 2007; Jung et al., 2014; Jung, Kang, Lee, and Zhou, 2015).”
The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions (2007, methodology): “Walsh (2005) builds on den Haan et al.”
Financial Reporting Quality and Labor Investment Efficiency (2014, neutral): “(2011), who demonstrate that the effect of financing constraints on labor investments is incremental to accompanying effects on capital investments, and with Merz and Yashiv (2007), who show that investments in labor have an incremental effect on firm value beyond capital investments.”
Wage Rigidity: A Solution to Several Asset Pricing Puzzles (2012, neutral): “Related literature While the macroeconomic literature on wages and labor is quite large (for example Pissarides (1979)), there has been surprisingly little work done relating labor frictions to finance; notable examples are Uhlig (2007) and Merz and Yashiv (2007).”
Endogenous Technological Progress and the Cross Section of Stock Returns (2012, neutral): “In particular, consistent with Zhang (2005), I assume in Eq.”
Firm-Level Productivity, Risk, and Return (2014, neutral): “We follow Bazdresch, Belo, and Lin (2010) in choosing the wage function parameter ω to equal 0.2, which matches the aggregate wage cyclicality estimated by Merz and Yashiv (2007).”
Evaluating the Performance of the Search and Matching Model (2006, methodology): “Castillo (1998) [who offers a detailed discussion and additional references concerning the CPS procedure] reports, using 1994 data, that about 30% of this pool actually searched for work in the 12 months prior to the survey, and 47% were in the prime age category (25-54).”
Search and matching frictions and optimal monetary policy (2008, methodology): “Using equations (34) and (36) to substitute for d mplt and ĉt in the social planners hours decision, equation (47), I obtain the following expression, which implicitly denes ĥt , at (1 )(n̂t + ĥt) = ĥt + (1)s 1 c fat + (n̂t + ĥt ) sv[(1 + )v̂ t n̂t]g: (53) v̂ t is the e¢ cient level of vacancies a”
Really Uncertain Business Cycles (2012, neutral): “We assume for simplicity that the stochastic volatility processes, σt and See, for example, Hayashi (1982), Nickell (1986), Shapiro (1986), Caballero and Engel (1999), Ramey and Shapiro (2001), Hall (2004), Cooper, Haltiwanger and Willis (2004), Cooper and Haltiwanger (2006), as well as Mertz and Ya”
Labor Hiring, Investment, and Stock Return Predictability in the Cross Section (2014, neutral): “At the aggregate level, labor frictions are explicitly modeled in Danthine and Donaldson ð2002; wage frictionsÞ and in Merz and Yashiv ð2007; hiring and firing frictionsÞ.2 Our work differs because we perform the analysis at the firm level, which allows us to use both time-series and…”
A THEORY OF WAGES AND LABOR DEMAND WITH INTRA‐FIRM BARGAINING AND MATCHING FRICTIONS* (2008, neutral): “Using the wage equation (19), we can rewrite the capital and labor demand as:”
The Costs of Hiring Skilled Workers (2012, background): “Varejão and Portugal (2007) report the presence of non-convexities, estimating a duration model of employment adjustment.4 Merz and Yashiv (2007) let adjustment costs for labor interact with those for capital.”
Labor Mobility: Implications for Asset Pricing (2014, background): “Bazdresch, Belo, and Lin (2013) and Merz and Yashiv (2007) incorporate labor, modeled as a production factor analogous to physical capital, into standard Q-theory asset pricing models to link a firm's hiring decisions with firm value and stock returns, respectively.”
Inventory Investment and the Cost of Capital (2013, neutral): “Richardson (1995) argues that noninterest inventory carrying costs (which are equivalent to depreciation) range from 19% to 43% per year, and other trade publications report rates up to 35%.”