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Dr. Xin Zou from Hong Kong Baptist University School of Business on how companies can protect their workforce and bottom line from stock market volatility.
Over the past few years, investing in the stock market has grown in popularity as a kind of passive income for people. According to Gallup, as of May 2022, 58% of Americans reported that they own stock of which 89% were adults in households earning US$100,000 or more and 79% were those with postgraduate education. This pattern has also been significantly influenced by the changes in work patterns, hybrid work and work-from-home policies, which have given many employees more time to look into new investment options to grow wealth.
Despite the volatility, data has shown that the stock market has given investors enticing profits. In March 2023, the S&P 500 was up 3.51% in March, bringing its YTD return to 7.03%, and several individual equities had delivered even higher gains. Additionally, it is now easier than ever for people to invest in the stock market.
The popularity of fractional share investment has made it possible for people to invest in expensive equities without having to buy an entire share. A lot of brokerages also provide commission-free trading, and the rise of retail trading services, have all made it simple for people to purchase and sell stocks.
Why companies need to consider employee’s investments as a significant issue
Stock market investment hence constitutes a significant portion of household incomes and as a result, has a significant impact on household wealth accumulation. This can directly affect aggregate tax revenues or indirectly reshape households’ real decision making.
But recent research conducted by Hong Kong Baptist University School of Business, studied how specifically labour supply responds to changes in stock market wealth. The research analysed the monthly performance of sales agents from a leading Chinese insurance company and the stock investment information from Shenzhen Stock Exchange (SZSE) to find that:
1. Stock investment returns have a significant negative effect on workers’ subsequent work output
Specifically, linking individual-level worker performance data with stock investment information showed that a 10% increase in the monthly returns is associated with a 3.8% decrease in the insurance sales commission in the subsequent month. Additionally, the impact is larger when the stock investment returns are higher relative to the baseline income of the worker.
2. The negative relation between stock investment returns and worker output is immediate
Only the last-month stock investment returns exhibited a statistically and economically significant impact on current-month sales commission – indicating that the effect is immediate and noteworthy. This temporal pattern of the response findings in the research is consistent with reference dependence theory – which conveys that workers have a short-term mental account and when they reach a specified reference income level, they cut back labour supply and choose to enjoy more leisure related activities.
It is not just stock market wealth, a different research has shown that housing prices, another major type of investment, can also affect shirking behaviour at the workplace. After positive shocks to house prices, affected homeowners experienced a fast and persistent increase (by 19% per month) in their propensity to use work hours to attend to personal needs.
Financial literacy can shock-proof and prepare employees for financial fluctuations
As investment wealth fluctuations cause changes in employee work behaviour and performance, there can be serious implications for company output and financial results. To mitigate any negative effects, organisations need to focus on financial wellbeing and that goes beyond than just offering decent pay.
Companies have a role to play in the financial literacy to their employees so they can make informed decisions about their personal finances, including their investments and retirement savings. By increasing employees' financial literacy, companies can help to reduce financial stress among their workforce and reduce any work output fluctuations.
Employees who are financially literate may be better equipped to understand and make informed decisions about company benefits such as stock options, retirement plans, and other investment opportunities. This can help to increase employee engagement and satisfaction, as well as promote a culture of ownership and responsibility for the success of the company.
Dell Technologies is one company that recognises this need and offers a 'Digital Wellness Platform' with resources for its staff’s physical, mental, and financial needs. On the other hand, US based Verizon, offers an employee assistance programme, or EAP, a free workplace benefit that offers support for workers facing financial challenges and non-retirement financial benefits.
The importance of employee financial literacy moving forward
Investment wealth fluctuations can have a significant impact on employee performance and output, and as more people turn to the stock market as a source of passive income, it will become increasingly important for companies to take action to protect their workforce and bottom line. It enables employees to make informed decisions about their own finances and understand how market changes may affect their work behaviour.
Businesses that support their employees' financial wellbeing and provide resources for their requirements are better able to withstand market swings and keep a productive staff. As we move forward, it is likely that financial literacy will become an even more essential aspect of workplace culture, and companies that prioritise it will be better positioned for success in the long term.
About the author: Dr. Xin Zou is an Assistant Professor of Finance in the Department of Finance and Decision Science at School of Business, Hong Kong Baptist University. She is the recipient of an external General Research Fund from the University Grants Committee of Hong Kong. Her research has been accepted for publication at top academic journals such as Journal of Financial Economics, American Economic Journal: Economic Policy, Management Science, Journal of Banking and Finance, and AEA Papers and Proceedings.
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