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Stickiness of employee expenses and implications for stock returns

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Abstract

This paper proposes a new measure for operating inflexibility based on firms’ downside stickiness of expenditures on employees. Firms are affected not only by labor unions, but also by human capital risks that influence firms’ expected stock returns. The contribution of the current study is to show, in general, that expenditures on employees affect firms’ operating inflexibility and thus account for higher stock returns. This may well be the first paper to conduct time-series predictability tests of market returns for market operating leverage, and to find a positive interaction in and out of sample.

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Fig. 1

Source: Author’s own calculation using data from CRSP and CRSP/Compustat Merged dataset

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Notes

  1. The sample length is about 52 years. A more recent year's analysis is interesting as well. The same procedures and regressions are performed from the year 2000 to 2015. The result is that REEA is significant at the 2% level when used alone. When adding size, book-to-market, past performance, and capital intensity, REEA remains significant at the 0.5% level. The economic impact stays about the same.

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Authors and Affiliations

  1. Department of Economics and Business Administration, Ariel University, Ariel, 40700, Israel

    Roi D. Taussig

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  1. Roi D. Taussig
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Correspondence to Roi D. Taussig.

Additional information

In memory of Simon Benninga.

This study is based on my PhD dissertation from Tel Aviv University, supervised by the late Simon Benninga and Ilan Cooper. I thank Yakov Amihud, Doron Avramov, Simon Benninga, Jason Chen, Ilan Cooper, Paulo Maio, Richard Priestley, Amir Rubin, and Avi Wohl for their helpful comments. I also thank seminar participants at the Hebrew University of Jerusalem, Tel Aviv University, the 51st Anniversary Meeting of the Eastern Finance Association (EFA) 2015 in New Orleans, USA, and the 25th annual meeting of the European Financial Management Association (EFMA) 2016 in Basel, Switzerland. Financial support from the Rosenfeld Foundation is gratefully acknowledged. Any remaining mistakes are my own.

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Taussig, R.D. Stickiness of employee expenses and implications for stock returns. Eurasian Econ Rev 7, 297–309 (2017). https://doi.org/10.1007/s40822-017-0070-4

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  • DOI: https://doi.org/10.1007/s40822-017-0070-4

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