What Drives Firms’ Hiring Decisions? An Asset Pricing Perspective

1 Sep 2023

Research

Finance

Frederico Belo; Andres Donangelo; Xiaoji Lin; and Ding Luo

Published in Review of Financial Studies, September 2023
(Presented at SFS Cavalcade North America 2020, Chapel Hill, NC, United States)

Professor Ding Luo of the Department of Economic and Finance and co-authors have developed an asset pricing perspective in an attempt to discover what drives firms’ hiring decisions. In a neoclassical dynamic model of the firm with labour market frictions, optimal hiring is a forward-looking decision that depends on both discount rates and expected cash flows. Empirically, Luo and colleagues show that the aggregate hiring rate of publicly traded firms in the U.S. economy negatively predicts stock market excess returns and long-term cash flows both in-sample and out-of-sample, and positively predicts short-term cash flows. They also show that through a variance decomposition, the time series variation in the aggregate hiring rate is mainly driven by changes in discount rates and short-term expected cash flows, each contributing to about 40% and 60% of the variation respectively, with no contribution from variation in long-term expected cash flows. Through structural estimation of the model, they show that labour adjustment costs and time-varying risk are essential for the model to replicate the empirical patterns.

Prof. LUO Ding

Professor Ding Luo joined City University of Hong Kong as an Assistant Professor of Finance in August 2018. He received his PhD in Finance from Carlson School of Management at University of Minnesota. Dr Luo specializes in empirical and theoretical asset pricing, and macro finance. His research has been published in Review of Financial Studies and presented in international conferences, including American Finance Association Annual Meeting, European Finance Association Annual Meeting, SFS Cavalcade North America, China International Conference in Finance, Northern Finance Association Annual Meeting, Econometric Society meetings, and Society for Economic Dynamics Annual Meeting.

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