Investor Behavior and the Benefits of Direct Stock Ownership

• Author: NICOLE L. CADE,DARREN BERNARD,FRANK HODGE
• Published date: 01 May 2018
• DOI: http://doi.org/10.1111/1475-679X.12198
• Date: 01 May 2018

DOI: 10.1111/1475-679X.12198

Journal of Accounting Research

Vol. 56 No. 2 May 2018

Printed in U.S.A.

Investor Behavior and the Benefits

of Direct Stock Ownership

DARREN BERNARD,

∗NICOLE L. CADE,

†AND FRANK HODGE

‡

Received 30 October 2015; accepted 29 November 2017

ABSTRACT

Using an experiment to rule out reverse causality, we examine whether a

small investment in a company’s stock leads investors to purchase more of the

company’s products and adopt other views and preferences that benefit the

company. Wepreregister our research methods, hypotheses, and supplemen-

tal analyses via the Journal of Accounting Research’s registration-based editorial

process. We find little evidence consistent with these hypotheses for the av-

erage investor in our sample using our planned univariate hypothesis tests,

and planned Bayesian parameter estimation shows substantial downward be-

lief revision for more optimistic ex ante expectations of the treatment effects.

∗London Business School; †University of Pittsburgh; ‡University of Washington.

Accepted by Robert Bloomfield. The authors thank two anonymous reviewers at the Journal

of Accounting Research, as well as Bob Bowen, Dave Burgstahler, Willie Choi, Harry Evans,

Stephanie Grant, Lisa Koonce, Kim Mendoza, Don Moser, Mark Peecher, Adam Presslee,

Rosh Sinha, Amanda Winn, workshop participants at the University of Pittsburgh, and

audience members at the 2017 Journal of Accounting Research Registered Reports of Empirical

Research Conference for their helpful comments and suggestions. The authors also thank

Ed deHaan, Harry Evans, Gale Gold Nichols, and Jamie Pratt for their help in facilitating

the experiment, Conor Brown for research assistance, and Starbucks Corporation for access

to data. Frank Hodge acknowledges financial support of the Michael G. Foster Endowed

Professorship. This paper is the final Registered Report resulting from the Registration-based

Editorial Process (REP) implemented by JAR for its 2017 conference; details of the process are

available here: https://research.chicagobooth.edu/arc/journal-of-accounting-research/2017-

registered-reports. The accepted proposal and an Online Appendix for this report

are available here: https://research.chicagobooth.edu/arc/journal-of-accounting-research/

online-supplements. Our report was originally titled, “Investor Behavior and the Benefits of

Dispersed Stock Ownership.” We adjusted the title because our analyses examine the benefits

of direct individual ownership and not ownership dispersion per se.

431

Copyright C, University of Chicago on behalf of the Accounting Research Center,2018

432 D.BERNARD,N.L.CADE,AND F.HODGE

In planned supplemental analyses, however, we do find that the effects of

ownership on product purchase behavior and on regulatory preferences are

intuitively stronger for certain subgroups of investors—namely, for investors

who are most likely to purchase the types of products offered by the company

and for investors who are most likely to vote on political matters. The results

contribute to our understanding of the benefits of direct stock ownership and

are informative to public company managers and directors.

JEL codes: G32; G40; M41

Keywords: direct stock ownership; investor behavior; Bayesian analysis; reg-

istered report

1. Introduction

Theory and empirical work consider a variety of benefits of stock owner-

ship by financial intermediaries such as pension funds and banks for di-

mensions of firms’ operating performance (e.g., Almazan, Hartzell, and

Starks [2005], Chen, Harford, and Li [2007], Aghion, Van Reenen, and

Zingales [2013]). In contrast, relatively few papers examine the benefits

of direct, individual ownership on operating performance. In this study,

which was preregistered via the Journal of Accounting Research’s registration-

based editorial process, we predict that even small amounts of stock own-

ership can change individual investors’ behaviors in ways that benefit the

firm. In particular, we predict that stock ownership leads investors to pur-

chase more of the firm’s products and adopt other views and preferences

that benefit the firm. We further expect these effects are not limited to

the investors themselves; that is, we expect investors’ altered behavior to

spread within social networks to influence the behavior of friends, family,

and colleagues. Although our primary focus is on product and regulatory

preferences that could positively affect the firm’s operating performance,

we also provide evidence on other potential capital market benefits asso-

ciated with direct stock ownership—for example, the effects on investors’

earnings expectations and assessments of financial reporting and earnings

quality.

A key challenge to identify the effect of stock ownership on individual

investor behaviors is to rule out reverse causality. For example, the few

prior papers that examine the effect of stock ownership on product pref-

erences (including the propensity for repeat patronage and other brand-

loyal behaviors) rely on survey evidence from Nordic countries (Aspara,

Nyman, and Tikkanen [2008], Aspara [2009]). Although these papers find

an association between stock ownership and current product preferences

or future purchase intentions, prior literature also provides consistent ev-

idence that investors follow the popular investment mantra to “buy what

you know” (MacGregor et al. [2000], Schoenbachler, Gordon, and Aurand

[2004], Frieder and Subrahmanyam [2005], Aspara and Tikkanen [2011],

THE BENEFITS OF DIRECT STOCK OWNERSHIP 433

Keloharju, Kn¨

upfer,and Linnainmaa [2012]), which suggests that purchase

behavior and beliefs about a company also influence the choice to invest.

In contrast to prior archival and survey evidence, we address the reverse

causality confound by generating data using an experiment in which in-

vestors are randomly assigned stock ownership. After several months, we

collect data on actual purchase behavior and on a number of investors’

other views and preferences.1

Graduate business students enrolled in introductory financial account-

ing classes at three universities form our sample of individual investors. We

conduct the experiment at multiple universities to obtain a large sample

of participants and to address certain alternative explanations for the re-

sults, as discussed further below. At the beginning of the academic term,

students are told that if they opt in they will be given a $20 investment in

a publicly traded company, and in exchange for their participation they

will receive the market value of their stock as of a prespecified date in the

following academic term. Upon opting into the study, participants are ran-

domly assigned ownership in either Starbucks Corporation or one of three

control companies. Participants learn the names of all companies included

in the experiment to ensure any unintentional endorsement of each com-

pany is constant across conditions.2Figure 1 illustrates the timing of the

experiment.

We collect data using an in-class poll and an online survey. The in-class

poll occurs during the academic term and examines whether stock owner-

ship differentially affects participants’ stated preference for Starbucks prod-

ucts to be served at a business school event—that is, participants’ use of oth-

ers’ money to purchase Starbucks products. We distribute the online survey

at the end of the academic term. Within this survey, participants indicate

how likely it is they would vote for a possible regulatory action that would

negatively affect Starbucks’ financial performance and use credit and debit

card statements and their Starbucks Rewards Account (if applicable) to

provide information on their Starbucks product purchases since receiving

the investment. Participants also answer a variety of questions throughout

the survey to inform potential mechanisms through which stock ownership

1Prior papers that study the association between stock ownership and product preferences

typically do not collect data on actual purchases. One exception to this is Keloharju, Kn¨

upfer,

and Linnainmaa [2012], who examine evidence from Finland that gifts or inheritances of

stock in brokerage companies are associated with subsequent patronage of those companies.

The implicit assumption of these tests is that inheritances and gifts of stock are not associated

with the recipient’s ex ante product preferences or purchase intentions and are not viewed

as an implicit recommendation by the donor. They find mixed evidence: gifts, but not inheri-

tances, have a statistically significant association with subsequent patronage.

2Altogether, participants receive an investment in one of four companies—Starbucks Cor-

poration, Microsoft Corporation, Procter & Gamble Company, or 3M Company.Roughly half

of the participants at each university receive an investment in Starbucks; all other participants

receive an investment in one of the other three companies.