Information Dispersion across Employees and Stock Returns

Abstract

Rank-and-file employees are becoming increasingly critical for many firms, yet we know little about how their employment dynamics matter for stock prices. We analyze new data from the individual CV’s of public company employees and find that rank-and-file labor flows can be used to predict abnormal stock returns. Accounting data and survey evidence indicate that workers’ labor market decisions reflect information about future corporate earnings. Investors, however, do not appear to fully incorporate this information into their earnings expectations. The findings support the hypothesis that rank-and-file employees’ entry and exit decisions reveal valuable insights into their employers’ future stock performance.

Accounting for employee flows

“…Finally, our results complement research suggesting that equity investors do not fully incorporate employee flow information into their assessments (e.g., Agrawal et al., 2021; Lev & Wu, 2022; Li et al., 2022). Our specific contribution lies in showing that departures of high‐paid employees are priced while other employee flows are not, despite their ability to predict earnings changes.…”

“…Consequently, using information on both employee gross inflows and outflows yields better earnings predictions than using only one measure (e.g., Gutiérrez et al, 2020;Li et al, 2022) or a net measure. Finally, our results show that lenders, like equity investors (Agrawal et al, 2021;Lev & Wu, 2022;Li et al, 2022), do not fully incorporate employee flow information into their assessments. Our results could help regulators in deciding which information on employees financial reporting preparers should disclose to alleviate informational problems.…”

“…On one hand, gross employee flows are not consistently publicly disclosed, and banks may not be aware of their potential to predict firm performance. For example, the literature suggests that equity investors do not fully incorporate employee flow information into their assessments (Agrawal et al., 2021; Lev & Wu, 2022; Li et al., 2022). On the other hand, banks have more direct access to firms than equity investors do and could request private information (Bharath et al., 2008).…”

“…The literature also labels this as separations, turnover, employee exit and (gross) labor outflows. (Agrawal et al, 2021;Li et al, 2022), we can count the actual annual number of employees arriving and departing for a significant proportion of Danish limited liability firms across the period of 1998−2016. The data also provide information on salary, position within the firm, tenure, age, gender and education, data that allow us to control for (and condition on) various factors not found in most other settings.…”

“…To obtain information about employees and their dates of employment, we use Denmark's Integrated Database for Labor Market Research (IDAN), an economy‐wide employer‐employee‐matched administrative database. Thus, rather than using survey data, job postings (e.g., Gutiérrez et al., 2020) or employees’ self‐reported LinkedIn profiles (Agrawal et al., 2021; Li et al., 2022), we can count the actual annual number of employees arriving and departing for a significant proportion of Danish limited liability firms across the period of 1998−2016. The data also provide information on salary, position within the firm, tenure, age, gender and education, data that allow us to control for (and condition on) various factors not found in most other settings.…”