The Cross-sectional Return Predictability of Employment Growth: A Liquidity Risk Explanation

Weimin  Liu; Di Luo; Seyoung  Park; Huainan Zhao

doi:10.1111/fire.12279

The Cross-sectional Return Predictability of Employment Growth: A Liquidity Risk Explanation

Weimin Liu, Di Luo (Lead / Corresponding author), Seyoung Park, Huainan Zhao

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Abstract

Employment growth (EG) is related to liquidity fundamentals of investment opportunities, firm health, and information environment and quality. This, in turn, implies that liquidity risk may play a role in explaining the relation between EG and stock returns. We find strong empirical evidence supporting the link between EG and liquidity risk. Stocks of high-EG firms are more liquid and exposed to lower liquidity risk than stocks of low-EG firms. After adjusting for liquidity risk, EG loses its power to predict returns.

Original language	English
Pages (from-to)	155-178
Number of pages	24
Journal	Financial Review
Volume	57
Issue number	1
Early online date	11 Aug 2021
DOIs	https://doi.org/10.1111/fire.12279
Publication status	Published - Feb 2022

Keywords

employment growth premium
labor hiring
liquidity risk

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10.1111/fire.12279

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title = "The Cross-sectional Return Predictability of Employment Growth: A Liquidity Risk Explanation",

abstract = "Employment growth (EG) is related to liquidity fundamentals of investment opportunities, firm health, and information environment and quality. This, in turn, implies that liquidity risk may play a role in explaining the relation between EG and stock returns. We find strong empirical evidence supporting the link between EG and liquidity risk. Stocks of high-EG firms are more liquid and exposed to lower liquidity risk than stocks of low-EG firms. After adjusting for liquidity risk, EG loses its power to predict returns.",

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AB - Employment growth (EG) is related to liquidity fundamentals of investment opportunities, firm health, and information environment and quality. This, in turn, implies that liquidity risk may play a role in explaining the relation between EG and stock returns. We find strong empirical evidence supporting the link between EG and liquidity risk. Stocks of high-EG firms are more liquid and exposed to lower liquidity risk than stocks of low-EG firms. After adjusting for liquidity risk, EG loses its power to predict returns.

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KW - labor hiring

KW - liquidity risk

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The Cross-sectional Return Predictability of Employment Growth: A Liquidity Risk Explanation

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