Buy low, sell high (but keep working…)

By Dr. Xin Zou

From the dot com bubble of the late 1990s to the more recent “meme stocks” craze, individual investors have dreamt of making a killing on the stock market to supplement their lifestyle. But as employees keep an eye on stock market fluctuations, do they remain productive at work? A recent paper[1] sets to explore whether – and how – the gains made on the stock market impacts the drive of individuals to perform at work.

As discount brokers and low costs ETFs make it ever easier to dabble in stocks, an increasing proportion of households’ wealth is tied to the stock market. In the US, for instance stocks account for up to 36% of a household’s financial assets. It is thus no surprise that stock market fluctuations play a large role not only on wealth accumulation but also on the real economy, as fortunate investors tend to consume more and work less while those picking the wrong stocks are forced to tighten their belts and work longer hours to make up for their losses.

Looking at data on 17 000 insurance agents from a leading Chinese life insurance company’s major city branch between 2013–2016, the paper links the sales commission received by agents with the investments made by these same agents on the Shenzhen Stock Exchange (“SSE) in order to track how – measured on a monthly basis – the returns on these individual-specific stock market investments relate to the work performance of the individuals that bought the stocks.

It turns out that how much we make on the stock market does indeed impact our working habits. Indeed, findings show that a 10% increase in monthly stock returns was associated with a 3.8% drop in the sales commission paid to the employee who invested in the SSE. Perhaps not surprisingly, the impact on productivity was also larger when the stock investment returns were higher relative to an agent’s salary. Interestingly, stock market returns seemed to have had no impact on whether an agent got promoted or demoted, while the quality of the products sold by the agents was unchanged. It’s also worth noting that this negative relation between stock investment returns and subsequent sales commission proved short-lived: only the stock returns made the previous month impacted productivity. Meanwhile, customers were just as likely to renew their policy regardless of the stock market gains made by their agents, perhaps because renewing an existing policy is easier than selling a new one.

Given the negative impact on worker productivity, employers should be proactive in helping employees become better investors. Since a salary may not be enough to promote financial well-being, alternatives like corporate pension funds and stock options may help harness the trading habits of employees for the benefits of the company, especially when more sales translate in a higher stock price. Meanwhile here’s a tip: instead of purchasing a cool product, consider buying the shares of the company that makes it instead!  

Reference:

[1] Li T., Qian W., Xiong W.A. & Zou X. “Employee output response to stock market wealth shocks” Journal of Financial Economics 146 (2022) 779-796 (https://doi.org/10.1016/j.jfineco.2021.11.005)