Productivity, risk, and expected stock returns: In memory of Simon Benninga

This study suggests a new measure of productivity for production factors. Adjustment costs for capital-intensive firms are higher than for labor-intensive firms (the differences are systematic). Therefore, higher changes in capital relative to labor will induce higher risk. The capital/labor ratio has been studied extensively. However, the new measure is based on other items, which facilitate the marginal changes in capital and labor, rather than quantities. When the elasticity of capital to labor (ECL) is higher, stock returns are significantly higher as well. This is true both statistically and economically.