Asset pricing implications of firms' profit sharing

Abstract

This study examines the asset pricing implications of a profit-sharing policy by measuring a profitsharing coefficient (PSC) that captures the firm's tendency to share profits with its employees. We find that firms with a high PSC earn higher future stock returns than firms with a low PSC. This arises because investors underestimate the positive effects of PSC on worker productivity while overreacting to the potential costs due to the high PSC. We further reveal PSC to be inversely associated with firm risk by showing that the earnings and stock returns of high-PSC firms are less sensitive to aggregate risk than those of low-PSC firms.