Labor Productivity, Return Predictability, and Operating Profitability

ABSTRACT 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.