Abstract

Merging confidential firm-level price data with stock returns, I document that the frequency with which individual firms adjust their product prices is associated with a cross sectional return premium of more than 4% per year. The premium for sticky price firms is a pervasive feature of the data, is not driven by industry characteristics and holds up an extensive set of robustness checks. The return differential is highly predictable in the time series by the consumption-wealth ratio, cay, and it is fully explained by differential loading on systematic risk in the cross section. The sticky price portfolio has a conditional market beta of 1.29, which is 0.37 higher than the beta of the flexible price portfolio. The frequency of price adjustment is therefore a strong determinant of the cross section of stock returns. I develop a multi-sector production-based asset pricing model with sectors differing in their frequency of price adjustment and find that this model can rationalize these facts.