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Rand Study Finds Connection Between People Investments and Stock Prices

Jeffrey WengerAn analysis using AI finds a correlation between meaningful investments by publicly held retailers in front-line workers and their share price performance.

Only Substantive Disclosures Affect Share Prices
More Proof of a Human Capital Alpha?

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George ZuoIn the past, a traditional rule of thumb is that investors tend to sell shares in retail stocks when they announce greater investments in people. This recent study using AI by Rand, a not-for-profit California-based research organization, finds that retailers making what it describes as meaningful disclosures about investments in people in their Securities & Exchange Commission (SEC) filings experience a 2-2.5% increase in their share prices after their publication.
In the article, “The Long-Run: High-Quality Employee Investments Boost Stock Performance,” by Jeffery B. Wenger and George Zuo, the authors state that they “found that retailers that made strong disclosures about investing in workers saw their short-term stock prices increase anywhere from 2% (within two weeks of the disclosure) to 2.5% (within 30 days of the disclosure). The results were quite robust, even after controlling for the wide array of financial data contained within the SEC filing.”
Jeffrey B. Wenger is the director of the Rand Lowy Family Middle-Class Pathways Center. George Zuo, an applied microeconomist, works at Rand researching policies bridging economic, education, and health disparities in the United States.

Only Substantive Disclosures Affect Share Prices Rand

According to the article, Rand analyzed SEC disclosures by the retail sector both before and after the SEC began to require human capital disclosures by public companies in their annual 10-K filings.  “Using AI, we analyzed these information-dense SEC disclosures dating back to 2000. In short, we found that retailers' post-2020 filings contain important nuggets about how they are investing in people—and that this information can often predict stock performance.”
The authors write that “our AI tool distinguished between smart, substantive statements and corporate blather like, ‘to support our growth and enhance the guest experience, we will continue to attract, develop, and retain at all levels and in all functional areas.’ Oh really? One wonders how. By contrast, high-quality statements that our AI identified read more like this one from a major home improvement chain: ‘Since 2018 the company has invested more than $3 billion in incremental wages and share compensation for frontline associates, including the creation of new roles for associates to grow into.’”

More Proof of a Human Capital Alpha?

This study should hit a nerve in today's market, the authors write. “Investors are hungry for companies that play the long game, including when it comes to their employees. Companies are also navigating a crunch for talent: Frontline workers gained significant leverage during the pandemic, and upward mobility and working conditions consistently rank near the top of their priorities.”
They conclude: “As economists, we're frequently asked for stock tips and clues about how to get rich. Rarely do we have good answers, but here's a tip that could pay off in spades in the long term. Investors know that a 7% rate of return doubles an investment every 10 years: $10,000 today could grow to $80,000 in 30 years. A 9% rate of return, however, could transform that same $10,000 into $160,000 over the same time span. So how do you gin up that extra 2%? Research we conducted at Rand finds that one way might be to hold stock in companies that make high-quality and substantively meaningful investments in their people—and specifically their frontline workers.”

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