Labor Links, Comovement, and Predictable Returns

Yukun Liu and Xi Wu

♦ Using firms’ online job postings, we identify economically related peer firms in the labor market. Firms’ labor peers are vastly different from their industry peers, where the overlap is about 20%. Returns of labor-linked firms strongly comove, suggesting common responses to labor market shocks on average. However, industry shocks can affect firms outside the industry through the labor network, leading to substitution effects between labor peers. Lastly, we show that investors do not promptly incorporate news about labor-linked firms, leading to predictable subsequent returns. A long-short strategy exploiting this delay generates an average annualized excess return of 9%.

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