Labor Turnover, Firm Investment, and Stock Returns

Abstract

This study examines the effect of labor turnover on firm investment decisions and stock returns. We set up a model that features negative effects of labor turnover on firms’ productivity, heterogeneous job characteristics, and procyclicality of the overall labor turnover. The empirical analyses based on the model implications using the U.S. stock market data show that low labor turnover firms earn higher stock returns than high labor turnover firms. This negative relation between labor turnover and stock return is stronger among firms exposed to higher labor turnover costs. Our model implies that a decrease in labor turnover should be related to higher investment rates, and we confirm this empirically.