Abstract

I examine the asset pricing implications of technological innovations that allow capital to displace labor: automation. I develop a theory in which firms with high share of displaceable labor are negatively exposed to such technology shocks. In the model, firms optimally adopt technology to gain competitive advantage in the product market. Although automation increases an individual firm's competitive advantage, in equilibrium competition erodes profits and decreases firm value. Empirically, I develop a firm-level measure of displaceable labor share, based on detailed job classifications from the O*NET database, and find that firms with high displaceable labor share have negative exposure to technology shocks. A long-short portfolio sorted on this new measure is highly correlated with existing macroeconomic measures of technology shocks. Firms with negative exposure to these technology shocks earn a 4% per year return premium. The premium is positively predicted by decreases in the cost of capital goods. At the firm level, I confirm that a large negative exposure to technology shocks predicts lower employment and profitability following technology shocks, and these effects are amplified by higher within-industry competition.

Highlights

  • Technological advances over the last four decades have led to adoption of many new technologies.1 An important subset of these innovations, including for example robots and software, focus on automation that displaces human labor in favor of machine capital (see, e.g, Acemoglu and Restrepo (2017) and Autor, Levy, and Murnane (2003))

  • I demonstrate that a long-short portfolio of firms sorted on their share of displaceable labor replicates the dynamics of price changes in capital goods, creating a strong connection between a macroeconomic variable and the dynamics of stock returns

  • The model further highlights that the price of technology shocks depends on households’ idiosyncratic labor income when some of the households are replaced by capital

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Summary

The Model

I develop a two-period general equilibrium model that provides a clear picture of how technology shocks affect asset prices through stimulating labor displacement and technology adoption. Technology shocks decrease the price of capital and motivate firms to automate by adopting capital-based production. Firms in sector s = 1 have an opportunity to automate by adopting capital-based production upon the occurrence of a technology shock in the second period as described in more detail in below. The number of firms is large enough so that each firm can abstract from the consequences of its choices for the sector level aggregates Firms produce their goods using either a labor-based, Yfl,s,t = Lf,s,t, or a capital-based linear production function, Yfk,s,t = Kf,s,t. I choose the aggregate consumption goods as a numeraire by setting its price PC,t ≡ 1, and assume that ν−1 ν This assumption implies that firm-specific goods within a given sector are closer substitutes than sector-specific goods.

Households
Valuation
Equilibria
Implications for Firms Risk Exposure and the Dynamics of Stock Returns
Implications for Stock Return Premium
Financial Data
Measuring Technology Shocks Embodied in Capital
I-shock as an Income State Variable
Co-movement
Firms’ Exposure to Technology Shocks
Exposure to Technology Shocks and Return Premium
Return Premium
Time Variation and Predictability of the Return Premium
Firms’ Responses to Technological Shocks
Conclusion
Findings
High βKML High-Low βKML
Full Text
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