Local labor market and the cross section of stock returns

Local labor market pooling is a crucial benefit in the economics of agglomeration (Marshall, 1890). To capture the pooling function, we employ segment information and occupation statistics to capture average pairwise labor force similarities for each focal firm. We find that firms in thicker local labor markets are underpriced and display significantly positive stock returns afterwards. The return predictability of local labor market measure is concentrated in non-mega cap firms; high-tech firms; younger firms; and firms with more high-skilled labor, less routine tasks, and lower labor intensity. Our results are robust to a battery of control variables and alternative measure specifications.