Labor-Technology Substitution: Implications for Asset Pricing

Abstract

This paper studies the asset pricing implications of a firm's opportunities to replace routine-task labor with automation. I develop a model in which firms optimally undertake such replacement when their productivity is low. Hence, firms with routine-task labor maintain a replacement option that hedges their value against unfavorable macroeconomic shocks and lowers their expected returns. Using establishment-level occupational data, I construct a measure of firms' share of routine-task labor. Compared to their industry peers, firms with a higher share of routine-task labor (i) invest more in machines and reduce more routine-task labor during economic downturns, and (ii) have lower expected stock returns.