Labor‐Technology Substitution: Implications for Asset Pricing

Abstract

This paper studies the asset pricing implications of a firm's opportunities to replace routine‐task labor with automation. I develop a model in which firms optimally undertake such replacement when their productivity is low. Hence, firms with routine‐task labor maintain a replacement option that hedges their value against unfavorable macroeconomic shocks and lowers their expected returns. Using establishment‐level occupational data, I construct a measure of firms' share of routine‐task labor. Compared to their industry peers, firms with a higher share of routine‐task labor (i) invest more in machines and reduce more routine‐task labor during economic downturns, and (ii) have lower expected stock returns.

Local Risk, Local Factors, and Asset Prices

“…Eisfeldt and Papanikolaou (2013) consider organization capital, Hansen, Heaton, and Li (2005) and Li and Liu (2012) investigate intangible capital, and Belo and Lin (2012) and Jones and Tuzel (2013a) study the implications of having inventory as part of firms' productive assets. Zhang (2016) explores heterogeneity of firms in terms of their human capital that can be replaced by machines, namely, routine-task labor, and finds that firms with a higher share of routine-task labor earn lower expected returns, since routinetask labor proxies for a hedging option for the firms. Tuzel (2010) studies the asset pricing implications of firms' real estate holdings, finding that firms that own more structures (real estate) are less flexible, hence riskier, and earn higher risk premia.…”

An augmented capital asset pricing model using new macroeconomic determinants

“…The simplest and most common benchmark asset pricing model in both practice and research is single-period and one-factor capital asset pricing model (CAPM, Sharpe, 1964 ) as shown in a report of survey results by a professional organization ( The Association for Financial Professionals, 2013 ), a report by a leading financial services company ( The Credit Suisse, 2013 ), and recent studies ( Barillas and Shanken, 2018 ; Barillas et al., 2019 ; Chib et al., 2020 ). However, the CAPM possesses limitations in both research and practices ( Barillas and Shanken, 2018 ; Gungor and Luger, 2019 ; Lee, 2019 ; Zhang, 2017 , 2019 ). Therefore, researchers have augmented or propose alternatives to the CAPM.…”

Automation and the displacement of labor by capital: Asset pricing theory and empirical evidence

“…The exposure of the KML portfolio to market is practically zero. This is an important distinction from Zhang (2019) . While Zhang's main observation is that Rshare sorts are related to β market , the APsorts have a clear relationship to technology shocks β Ishock and are unrelated to the market risk exposure β market .…”

“…ppent or ppegt is preferred as it is consistently available for the full time period and the sample of firms. 26 The definition of the AP measure is distinct from the Rshare variable in Zhang (2019) . Although both measures share one similar ingredient, the routine task intensity, the measures are very different, both conceptually and empirically.…”

“…To the best of my knowledge, this study is first to draw the link between capital-embodied technology shocks and stock returns of these firms. Zhang (2019) uses a different measure of displaceable labor while studying stock returns. Zhang does not examine the effect of technological change on the crosssection of expected stock returns, but instead analyzes firms' exposures to aggregate market risk and explicitly states that technology shocks do not play a central role in his analysis.…”