Labor Productivity, Return Predictability, and Operating Profitability

Labor productivity plays a crucial role in fundamental analysis, yet its impact on stock market valuation remains relatively unexplored. We show that labor productivity contains value-relevant information incremental to equity book value and abnormal earnings. Moreover, labor productivity has the ability to predict future profitability and stock returns. Cross-sectional regression results show that labor productivity remains a significant return predictor after controlling for size, book-to-market, momentum, asset growth, and profitability. We also find that the productivity premium is less likely to be driven by limits-to-arbitrage or labor adjustment costs. Overall, our study sheds new light on how labor productivity, a fundamental but previously neglected factor, translates into firm value.