Wage Differentials, Firm Investment, and Stock Returns

This study investigates the effects of labor costs on firms' capital investments and stock returns. I estimate wage premia across US industries and show that the negative investment-return relation implied by (Formula presented.) -theory is steeper for firms paying high wage premia than for firms paying low wage premia. An extended investment-based model predicts the interaction effect, showing the labor adjustment costs as the key channel driving investment-return sensitivity. The inflexibility induced by labor costs offers new insights into asset prices and corporate investments.