Advances in technologies and automation prompted this study which answers the following question:
1. Does displaceable labor affect firms’ value and exposure to technology shocks?
What are the Academic Insights?
The author develops a general equilibrium model of optimal technology adoption with heterogeneous firms that monopolistically compete in product markets, and heterogeneous households that experience uninsurable idiosyncratic labor-income shocks. While automation can benefit an individual firm, it entails adoption cost. By studying the occupational characteristics from the O∗Net database, stock information from CRSP, and the composition of the labor force from Occupational Employment Statistics (OES), the author finds:
1. Firms with a high share of displaceable labor have more negative exposure to technology shocks.
2. A long-short portfolio sorted on this variable mimics macroeconomic measures of technology shocks. Negatively exposed firms earn a 4% annual return premium consistent with displacement risk from technological progress.
Why does it matter?
In a competitive environment, firms’ automatable labor increases riskiness. This paper shows that automation becomes a costly necessity for firms and erodes potential rents from technological improvements while efficiency gains are passed on to consumers.
The Most Important Chart from the Paper:
I examine the asset pricing implications of technological innovations that allow capital to displace labor: automation. I develop a theory in which firms with displaceable labor are negatively exposed to such technology shocks. In the model, firms optimally adopt technology to gain competitive advantage; but in equilibrium, competition erodes profits and decreases firm value. Empirically, I find that firms with high share of displaceable labor have negative exposure to technology shocks. A long-short portfolio sorted on this variable mimics macroeconomic measures of technology shocks. Negatively exposed firms earn a 4% annual return premium consistent with displacement risk from technological progress.
Dr. Elisabetta Basilico is a seasoned investment professional with an expertise in "turning academic insights into investment strategies." Research is her life's work and by combing her scientific grounding in quantitative investment management with a pragmatic approach to business challenges, she’s helped several institutional investors achieve stable returns from their global wealth portfolios. Her expertise spans from asset allocation to active quantitative investment strategies. Holder of the Charter Financial Analyst since 2007 and a PhD from the University of St. Gallen in Switzerland, she has experience in teaching and research at various international universities and co-author of articles published in peer-reviewed journals. She and co-author Tommi Johnsen published a book on research-backed investment ideas, titled Smarte(er) Investing. How Academic Insights Propel the Savvy Investor. You can find additional information at Academic Insights on Investing.
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