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 displaceable labor are negatively exposed to such technology shocks. In the model, firms optimally adopt tech-nology to gain competitive advantage but in equilibrium competition erodes profits and decreases firm value. Empirically, I find that firms with high share of displaceable labor have negative exposure to technology shocks. A long-short portfolio sorted on this variable mimics macroeconomic measures of technology shocks. Negatively exposed firms earn a 4% annual return premium consistent with displacement risk from technological progress.(c) 2022 The Author. Published by Elsevier B.V. This is an open access article under the CC BY license ( http://creativecommons.org/licenses/by/4.0/ )