Cumulative Abnormal Returns Analysis
Work to Own is focused on developing measurement tools to assist public companies to more fully understand the impact of employee ownership on financial performance.
Our team has analyzed employee ownership (EO) data for the largest 1,500 publicly-traded companies in the United States. This sample of companies represents roughly 80% of the U.S. stock market.
We ranked all 1,500 firms based on an estimate of the percentage of outstanding shares each provides to its employees, relative to the median ownership percentage of the whole sample. We split this sample into three equally-sized portfolios representing companies that score High, Medium or Low (H, M or L) on our preliminary measure of employee ownership.
Our initial analysis has revealed that firms with high employee ownership generate abnormal returns, meaning returns that exceed what is expected based on the systematic risk profile of the portfolio.
The chart at the right shows the cumulative abnormal returns (CAR) for the H, M and L portfolios. The systematic risk for all three portfolios suggests that $100 invested today will grow to $130 in three years. This equates to roughly 10% per year, which is roughly the long-term average return of the S&P 500. Our initial results show that the H portfolio generates a 25% premium in three years, significantly outperforming the L portfolio.
Our results to date are encouraging. Based on our preliminary measure, firms with the highest levels of employee ownership also have significantly higher stock returns than their peers. Our measurement system is based on shares that companies issue to employees through share-based compensation and ESOP programs.
Firms currently disclose limited employee compensation information. Our results could change with the release of more detailed data from companies.
Cumulative Abnormal Returns (CAR) for Three Equal Sized Portfolios
L: Portfolio with low employee ownership
M: Portfolio with medium employee ownership
H: Portfolio with high employee ownership
Date EO CAR
03/27/2024 L 0.95
03/27/2024 M 1.04
03/27/2024 H 1.25
The Simple Interpretation
The H portfolio of high employee ownership firms beats the S&P 500 by 25%.
Firms with average and below average employee ownership perform similarly to the S&P 500.
Disclaimer: The above results are portfolio cumulative abnormal returns based on employee share ownership using publicly available data. The stock of employee shares was calculated using the accepted perpetual inventory method and a vesting period of five years, which is generally consistent with option vesting period. The reported results may be subject to change and therefore the results should be treated as both suggestive of the valuation benefits of employee ownership and preliminary.