Automation and the Displacement of Labor by Capital: Asset Pricing Theory and Empirical Evidence

I examine the asset pricing implications of technological innovations that allow capital to displace labor: automation. I develop a theory in which firms with high share of displaceable labor are negatively exposed to such technology shocks. In the model, firms optimally adopt technology to gain competitive advantage in the product market. Although automation increases an individual firm's competitive advantage, in equilibrium competition erodes profits and decreases firm value. Empirically, I develop a firm-level measure of displaceable labor share, based on detailed job classifications from the O*NET database, and find that firms with high displaceable labor share have negative exposure to technology shocks. A long-short portfolio sorted on this new measure is highly correlated with existing macroeconomic measures of technology shocks. Firms with negative exposure to these technology shocks earn a 4% per year return premium. The premium is positively predicted by decreases in the cost of capital goods. At the firm level, I confirm that a large negative exposure to technology shocks predicts lower employment and profitability following technology shocks, and these effects are amplified by higher within-industry competition.