Labor Force Telework Flexibility and Asset Prices: Evidence from the COVID-19 Pandemic

We show that labor force telework flexibility (LFTF) is a first-order effect in accounting for the variations of asset prices and firm policies during the COVID-19 pandemic. Specifically, firms in high LFTF industries significantly outperform firms in low LFTF industries in stock returns. The positive LFTF-return relation extends to G7 countries and is stronger in countries with more severe pandemic. A decomposition analysis of the LFTF measure shows that the job characteristics associated with the central component of telework, information and communication technologies, are the main driving force of the result. A dynamic neoclassical model of firms operating multiple job tasks together with pandemic shocks captures the positive relationship between labor force flexibility and stock returns. The model mechanism highlights that i) job task flexibility is a key driving force of the cross-industry heterogeneity in firm value fluctuations, and ii) combining labor productivity (supply) and uncertainty shocks is crucial to generate the large drop and persistent recovery in firm value and output.