Employee Turnover as a Predictor of Stock Returns

Summary

This research review describes a link between employee movement and subsequent stock performance. It summarizes a study that estimates company hiring and departures from employee résumé histories, then tests whether net outflows predict returns. In event time, companies with lower net outflows after going public had stronger long-run abnormal returns. In calendar time, a monthly portfolio that bought firms with lower net outflows and shorted those with higher outflows produced positive factor-adjusted returns across several model and weighting choices.

The proposed explanation is that employees observe operational information that investors do not immediately incorporate into prices. Net outflows also predict higher future operating costs and lower net income and earnings per share, while analysts tend to overestimate earnings at high-outflow firms. The evidence is suggestive rather than definitive: the employee data are a nonrepresentative sample, omit many workers, and focus on relatively young public companies. Measurement error may weaken estimated relationships, and the review summarizes historical research rather than establishing a current, universally applicable trading strategy.

Key ideas

• Employee résumé histories can be aggregated to estimate company hiring, departures, and net labor flows.
• High net employee outflows are associated with weaker future stock returns in the reviewed analyses.
• The proposed mechanism is that employees hold dispersed information about company operations that investors process slowly.
• Net outflows predict higher operating expenses and weaker subsequent earnings, but show little relation to sales.
• The sample is nonrepresentative and incomplete, limiting the results' generalizability and measurement precision.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.