Capital to Labor Growth Ratio and the Cross-Section of Stock Returns

2016 Northern Finance Association Annual Meetings, Mont Tremblant, Quebec, Canada

The 11th Conference on Asia-Pacific Financial Markets (CAFM), Seoul, Korea

2014 Jerusalem Finance Conference - In honor of Professor Dan Galai and Professor Itzhak Venezia

59 Pages Posted: 6 Oct 2015 Last revised: 28 Nov 2016

See all articles by Kyung Hwan Shim

Kyung Hwan Shim

University of New South Wales (UNSW)

Date Written: November 28, 2016

Abstract

We examine the cross-sectional relation between the ratio of log growth in physical capital to log growth in labor and subsequent stock returns. The ratio is a negative predictor of abnormal returns and the relation strengthens with measures of financing constraint while remaining robust to previously provided determinants of returns. A ratio-based 2-factor model outperforms common asset pricing models explaining various anomalies indicating that anomalies reflect cross-sectional variation in growth ratio. We interpret the findings as outcomes reflecting displacements on the production isoquant, and show the pattern in returns is consistent with an investment-based model in which firms face financing constraints.

Keywords: Cross-section of stock returns, asset pricing, corporate investments, growth options, production technology, substitutability of labor for physical capital, factors of production, operating risk, stock return and risk, financial constraints, production flexibility

Suggested Citation

Shim, Kyung Hwan, Capital to Labor Growth Ratio and the Cross-Section of Stock Returns (November 28, 2016). 2016 Northern Finance Association Annual Meetings, Mont Tremblant, Quebec, Canada, The 11th Conference on Asia-Pacific Financial Markets (CAFM), Seoul, Korea, 2014 Jerusalem Finance Conference - In honor of Professor Dan Galai and Professor Itzhak Venezia, Available at SSRN: https://ssrn.com/abstract=2669456 or http://dx.doi.org/10.2139/ssrn.2669456

Kyung Hwan Shim (Contact Author)

University of New South Wales (UNSW) ( email )

306 Level 3 ASB
UNSW Kensington Campus
UNSW Sydney, NSW 2052
Australia
61293855852 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
63
Abstract Views
512
Rank
627,735
PlumX Metrics