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Industry-Specific Human Capital, Idiosyncratic Risk, and the Cross-Section of Expected Stock Returns



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    • Eiling is with the Rotman School of Management, University of Toronto. I would like to thank the Editor (Campbell Harvey), the Associate Editor, and an anonymous referee for insightful comments and suggestions. I am also grateful to Bruno Gerard, Frans de Roon, and Raymond Kan for many comments and discussions. Furthermore, I thank Lieven Baele, Olesya Grishchenko, Ravi Jagannathan, Frank de Jong, Ralph Koijen, Francis Longstaff, Hanno Lustig, Stijn van Nieuwerburgh, Theo Nijman, Tim Simin, Walter Torous, Kevin Wang, and participants at the 2009 American Finance Association meetings, the 2008 European Finance Association meetings, the 2008 Northern Finance Association meetings, the UCLA Anderson School, Tilburg University, Amsterdam University, the Stockholm School of Economics, HEC Paris, HEC Lausanne, Erasmus University, the University of Rochester, the University of Wisconsin–Madison, Rice University, Georgetown University, Rutgers University, the University of Toronto, the Free University of Amsterdam, and York University for helpful suggestions. I gratefully acknowledge the Award for Best Business Valuation Research Paper at the 2008 NFA meetings. Support for this research has been provided by a grant from the Netherlands Organization for Scientific Research (NWO). An earlier version of this paper was titled “Can Nontradable Assets Explain the Apparent Premium for Idiosyncratic Risk? The Case of Industry–Specific Human Capital.”


Human capital is one of the largest assets in the economy and in theory may play an important role for asset pricing. Human capital is heterogeneous across investors. One source of heterogeneity is industry affiliation. I show that the cross-section of expected stock returns is primarily affected by industry-level rather than aggregate labor income risk. Furthermore, when human capital is excluded from the asset pricing model, the resulting idiosyncratic risk may appear to be priced. I find that the premium for idiosyncratic risk documented by several empirical studies depends on the covariance between stock and human capital returns.

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