Are Employees Informed? Evidence from Employee Stock Ownership in Defined Contribution Pension Plans

Working Paper
2023 ACEM Doctoral Students Forum

This paper investigates the return predictability and information content of changes in employee ownership of own-company stock in defined contribution pension plans. Using the US Department of Labor’s Form 5500 data from 2000 to 2019, I find that a two-standard-deviation increase in the changes in employee stock ownership in a year is associated with a 2.2-to-2.5 percentage point increase in employers’ annualized abnormal returns in the subsequent year. The results are robust to both regression and portfolio sorting approaches, alternative return measures, and controlling for firm characteristics and reported insider trading activities. The changes in employee ownership are more predictive of employers’ stock returns in smaller firms and firms with higher information asymmetry and are positively associated with forthcoming annual earnings surprises and earnings announcement returns. The return predictability of aggregate employee trades is short-lived and confined to the period when such information remains non-public. Plan investment advisors appear to exploit advantage of their connection with the plans and trade in the same direction as employees prior to the public release of the plan information. Overall, this paper provides compelling evidence that employees engage in informed trading of their own-company stock in pension plans.

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