Does Firm-Level Productivity Predict Stock Returns?
Contrary to the findings of previous studies of U.S. stocks, we show that the total factor productivity (TFP) of Japanese manufacturing firms positively predicts their future returns in the cross-section when controlling for relevant risk factors, including those of Fama and French (2015). Risks related to in- tangibles, including research and development (R&D) and personnel expenditures, explain a substantial portion of the predictive power of TFP, while bankruptcy, macroeconomic and capital expenditure risks do not. Our results suggest that efficient high-TFP firms tend to be innovative in terms of high R&D expenditure and they invest in their organizational capital via high personnel expenditure. The return premium on these stocks is compensation for intangibles expenditure risks.
Firm-level productivity, Total factor productivity (TFP), Cross-section of returns, Investment risk, Research and development (R&D), Personnel expenditure, Organizational capital, Innovation