The Influence of Productivity on Asset Pricing

45 Pages Posted: 26 Mar 2008 Last revised: 6 Jan 2009

See all articles by Laurence David Booth

Laurence David Booth

University of Toronto - Rotman School of Management

Bin Chang

University of Ontario Institute of Technology

Walid Hejazi

University of Toronto - Rotman School of Management

Pauline Shum Nolan

York University - Schulich School of Business

Date Written: December 16, 2008

Abstract

Ceteris Paribus, highly productive industries should translate into high economic growth and high expected returns. To test this, we create a productivity factor using industry-level total factor productivity estimates. This factor captures the difference in returns between industries with high productivity and industries with low productivity. On average, the productivity premium contributes 0.75 to 2.41 percent per annum for the range of productivity factors we construct, from July 1963 to December 2002. To test whether productivity drives the cross-section of stock returns, we augment standard asset pricing models with this productivity factor. Our results show that i) in accordance with our hypothesis, productivity has a bigger impact on smaller firms, and that growth firms have a higher productivity beta, and ii) productivity is priced even when size and book-to-market factors are included. Finally, we examine the impact of productivity in different market structures, where the latter is measured by the Herfindahl index for each industry.

Keywords: Asset Pricing, Productivity

JEL Classification: G12

Suggested Citation

Booth, Laurence David and Chang, Bin and Hejazi, Walid and Shum Nolan, Pauline, The Influence of Productivity on Asset Pricing (December 16, 2008). Available at SSRN: https://ssrn.com/abstract=1107623 or http://dx.doi.org/10.2139/ssrn.1107623

Laurence David Booth

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Bin Chang

University of Ontario Institute of Technology ( email )

2000 Simcoe Street North
Oshawa, Ontario M5J2N3
Canada

Walid Hejazi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 287-7318 (Phone)

Pauline Shum Nolan (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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