We used AI to analyze 24 years of retailers’ SEC disclosures—and found the one factor that would have doubled investor returns
Jeffrey B. Wenger is director of the RAND Lowy Family Middle Class Pathways Center. George Zhou, an applied microeconomist, works at the RAND Corporation to research policies that close economic, educational, and health disparities in the United States.
As economists, we're often asked for stock tips and guides on how to get rich. We rarely have good answers, but here's a tip that can pay off big in the long run. Investors know that a 7% rate of return doubles the investment every 10 years: $10,000 today can grow to $80,000 in 30 years. However, a 9% rate of return could turn that same $10,000 into $160,000 over the same time period.
So how can you get that extra 2%? Research we conducted at RAND found that one way might be to hold stock in companies that make high-quality, fundamentally meaningful investments in their employees—specifically, front-line workers.
In 2020, the Securities and Exchange Commission required publicly traded companies to include information about their efforts to attract, develop, and retain employees as part of their annual disclosures. As a company's value became increasingly tied to knowledge (such as software patents and drug licenses), the SEC argued that disclosures needed to be updated in order to attract investments in workers—not just inventory, machinery, buildings, and land.
Our team of economists at the RAND Corporation took this opportunity to analyze what happened in the retail sector before and after 2020. Using artificial intelligence, we analyzed information-dense SEC disclosures dating back to 2000. In short, we found that retail traders' filings after 2020 contain important nuggets about how they invest in people — and that this information can predict many… Sometimes stock performance.
Our AI tool distinguishes between intelligent, objective data and corporate chatter such as: “To support our growth and enhance the guest experience, we will continue to attract, develop and retain guests at all levels and in all functional areas.” Oh really? One wonders how. By contrast, the high-quality data identified by our AI is very similar to this statement from a major home improvement chain: “Since 2018, the company has invested more than $3 billion in additional pay and stock compensation for front-line workers, including… This involves creating new roles for partners to grow.”
Using this approach, RAND AI evaluated how each large public retailer disclosed its investments in front-line workers. While many individual investors may not have AI at their disposal yet, we do a report It provides these ratings along with every excerpt from SEC filings that our AI pulled in order to calculate them. We have provided a full range of disclosures—from good information to egregiously vague information—for anyone seeking to use this information.
We then used this data to measure whether and how stock prices responded. We found that retailers who provided strong disclosures about investing in workers saw their short-term stock prices rise from 2% (within two weeks of disclosure) to 2.5% (within 30 days of disclosure). The results were very robust, even after controlling for a wide range of financial data included in the Securities and Exchange Commission filing.
This study should strike a chord in today's market. Investors are hungry for companies that play the long game, including when it comes to their employees. Companies are also facing a talent crunch: frontline workers have gained outsized influence during the pandemic, and upward mobility and working conditions consistently rank near the top of their priorities.
It would be helpful if the SEC provided clearer guidance on how companies describe their investments in talent. Current rules around disclosures allow companies to get away with saying a lot without really saying anything. But here's the bottom line of our findings: Companies that put their money where their mouth is, and invest in their front-line workers, could see a non-trivial bump in their financials if they were more clear and direct about what they're doing.
So, how do you get rich? If you invest patience money in companies that invest in their employees and wait 30 years, you'll likely get a return twice what you would have gotten otherwise. And you can do this while feeling good about improving retail workers' prospects. If you really want to go all-in, you can also shop at profitable, worker-focused retailers — win, win, win.
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