Stickiness of employee expenses and implications for stock returns

2022

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This article's main goal is to analyze the impact of market operating leverage (OL) on expected stock returns. While OL has been analyzed substantially in the literature, the analysis of an aggregate measure is new. The article begins with a cross-section analysis of 184,280 firm-year US firms, after which a former literature analysis is confirmed with current data. Next, an Aggregate Operating Leverage (AOL) is constructed. AOL predicts market returns both in and out of sample. Moreover, AOL significantly predicts the S&P500 Index, which is also of great consequence to practitioners.

“…Rahman et al. (2021) connected labor‐intensity to OL, and Taussig (2017) found that firms’ expenditures on employees relate to higher expected stock returns.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Donangelo (2021) found that labor expenses, which relate to OL, explain approximately 50% of the value premium. Rahman et al (2021) connected labor-intensity to OL, and Taussig (2017) found that firms' expenditures on employees relate to higher expected stock returns.…”

Section: Literature Reviewmentioning

confidence: 99%

Market operating leverage and expected stock returns

2022

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“…This study suggests that ECL relates to risk because adjustment costs for capital‐intensive firms are higher than for labor‐intensive firms (Chakrabarti, 2009). Former studies, which analyzed the capital‐labor ratio, based their measurements on balance‐sheet Property, Plant, and Equipment (PP&E) divided by number of employees, or Property, Plant, and Equipment divided by total assets (Chakrabarti, 2009; Taussig, 2017) – all of which are state quantities. The advantage in this study is that is measures marginal changes in capital and labor.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Productivity, risk, and expected stock returns

2022

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This study suggests a new measure of productivity for production factors. Adjustment costs for capital-intensive firms are higher than for labor-intensive firms (the differences are systematic). Therefore, higher changes in capital relative to labor will induce higher risk. The capital/labor ratio has been studied extensively. However, the new measure is based on other items, which facilitate the marginal changes in capital and labor, rather than quantities. When the elasticity of capital to labor (ECL) is higher, stock returns are significantly higher as well. This is true both statistically and economically.

“…Baek and Lee (2018) show how structural changes in P/E affect stock returns. Taussig (2017) shows that higher employee expenses (REEA) explain higher stock returns. Other scholar indicated more behavioral antecedents which affect stock return.…”

Section: Introductionmentioning

confidence: 99%

Renting risk and expected stock returns in memory of Simon Benninga

Klein

2021

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The holy grail of finance researchers and practitioners is to fully understand and explain the behavior of stock returns. The current study offers a new source of risk, which relates to firms' renting expenses. A major topic in finance and economics is whether to rent or own an asset. Specifically, this is interesting for businesses. This study uniquely analyzes a sample of 178,837 US firm‐year observations from 1963 to 2019. This analysis shows that a risk characteristic—the Ratio of Renting expenses To Assets (RORTA)—explains the cross‐section of stock returns. A higher RORTA explains higher expected stock returns. Interestingly, when analyzing only the past decade for robustness, the RORTA is the only characteristic which remains significant when controlling for Size and Book‐to‐Market. That is, Size and Book‐to‐Market are insignificant in the last decade.