Jeffrey B. Wenger is director of the RAND Center on Middle-Class Paths of the Lowy Family. George Tso, an applied microeconomist, works at RAND researching policies to address inequalities in the economy, education, and health care in the United States.
As economists, we are often asked for stock tips and tips on how to get rich. Rarely do we have good answers, but here’s a tip that can pay off big time in the long run. Investors know that a 7% return doubles the investment every 10 years: $10,000 today could grow to $80,000 in 30 years. However, a 9% rate of return could turn that same $10,000 into $160,000 over the same time period.
So how do you get that extra 2%? Research we conducted at RAND suggests that one way might be to own shares of companies that make high-quality, meaningful investments in their employees—and especially their rank-and-file employees.
In 2020, the Securities and Exchange Commission required public companies to include information about their efforts to attract, develop and retain workers as part of their annual reporting. As the value of companies is increasingly tied to knowledge (such as software patents and drug licenses), the Securities and Exchange Commission (SEC) said it needs to modernize disclosures to cover investments in workers, not just inventory. equipment, buildings and land.
Our team of RAND economists took this opportunity to analyze what happened in the retail sector before and after 2020. Using artificial intelligence, we analyzed these SEC disclosures dating back to 2000. In short, we found that retailers’ post-2020 earnings reports provide important insights into how they invest in people, and that this information can often predict stock performance.
Our AI tool differentiates between smart, meaningful statements and corporate chatter like: “To support our growth and improve the guest experience, we will continue to attract, develop and retain at all levels and in all functional areas.” Oh really? I wonder how? In contrast, the high-quality statements our AI found are more like these statements from a major home improvement chain: “Since 2018, the company has invested more than $3 billion in pay increases and stock compensation for frontline employees, including creating new positions. so that partners can grow.”
Using this approach, RAND’s AI assessed how each major public retailer discloses investments in its employees. Although many individual investors do not yet have AI at their disposal, our report provides these ratings along with all the excerpts from SEC filings that our AI extracted to calculate them. We have provided a full range of disclosures – from good to extremely vague – for anyone who wants to use this information.
We then used this data to assess whether and how stock prices reacted. We found that retailers that made extensive disclosures about employee investments saw their short-term stock prices rise from 2% (within two weeks of disclosure) to 2.5% (within 30 days of disclosure). . The results were highly reliable, even after taking into account the wide range of financial data contained in SEC filings.
This research should touch a nerve in today’s market. Investors crave companies that play the long game, including when it comes to their employees. Companies are also experiencing a talent shortage: frontline workers have gained significant leverage during the pandemic, with career mobility and working conditions consistently high among their priorities.
It would be helpful if the SEC provided clearer guidance on how companies should describe their investments in talent. Current disclosure rules allow companies to talk a lot without actually saying anything. But here’s the bottom line of our findings: Companies that put their money where their mouth is, investing in their front-line employees, could see non-trivial growth in their financial performance if they were more clear and direct about what they do.
So how to get rich? If you patiently invest in companies that invest in their employees and wait 30 years, it’s likely that you’ll earn returns that are double what you would have earned otherwise. And you can do this while enjoying improved prospects for retail workers. If you really want to go all in, you can also shop at these lucrative, worker-oriented retailers—win, win, win.
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