Lack of diversification among employee stock owners: An empirical evaluation of behavioral explanations

• Date: 01 September 2018
• Author: Andrew Pendleton,Andrew Robinson
• Published date: 01 September 2018
• DOI: http://doi.org/10.1002/hrm.21892

ORIGINAL ARTICLE

Lack of diversification among employee stock owners:

An empirical evaluation of behavioral explanations

Andrew Pendleton

1

| Andrew Robinson

2

1

Durham University Business School, Durham,

United Kingdom

2

Leeds University Business School, Leeds,

United Kingdom

Correspondence

Andrew Pendleton, Durham University

Business School, Mill Hill Lane, Durham DH1

3LG, UK.

Email: andrew.pendleton@durham.ac.uk

The article considers the reasons for employees holding large proportions of their financial sav-

ings and investments in company stock, drawing on explanations proposed in the behavioral

finance literature. Utilizing data from a survey of employees participating in the United King-

dom Save as You Earn stock options and savings scheme, it is found that substantial propor-

tions of stock owners hold sizeable concentrations of employer stock. Several explanations for

this risky behavior are tested, with familiarity, reciprocity, and inertia found to be associated

with portfolio concentration. Organizational commitment and “naïve extrapolation”from recent

stock prices are not. The implications for theory and practice are considered.

KEYWORDS

stock ownership, portfolio diversification, behavioural economics, employee ownership

1|INTRODUCTION

Employee ownership of their company's stock is a pervasive feature

of large companies in many advanced industrial countries, and there

is now a large literature in HRM on the determinants, characteristics,

and effects of this (see Kruse, Freeman, & Blasi,2010). A persistent

criticism of employee stock ownership is that company plans encour-

age employees to hold excessive volumes of employer shares in their

wealth portfolios, thereby exposing them to uninsured risk

(Munnell & Sunden, 2004). Substantial stock ownership in any single

company may violate standard investment principles relating to diver-

sification and spreading of risk. Company stock plans go further by

encouraging employees to concentrate their financial wealth and

human capital, with returns to both covarying with company perfor-

mance. There is a clear danger to employees' wealth and pension

security, as highlighted by corporate collapses such as Enron. Yet

there is widespread evidence, especially from 401(k) plans in the

United States, that many employees continue to have large holdings

of employer stock despite recent regulatory changes, moves by com-

panies to reduce allocations to company stock, and greater opportu-

nities to diversify out of employer stock (Walter & Corley, 2015).

Nearly 10% of new 401(k) participants held more than 50% of their

account in company stock (VanDerhei, Holden, Alsonso, & Bass

(2016). Utkus and Young (2014) found that over 50% of participants

in companies where contribution matches are provided in company

stock have over 20% of their plan balance in company stock. Why do

so many employees behave in this apparently irrational way?

Drawing on insights from behavioral economics, finance scholars

have put forward a range of explanations such as “excessive extrapo-

lation”from past stock prices (Benartzi, 2001), a preference for the

“familiar”(Huberman, 2001), organizational commitment (Cohen,

2008), and inertia (Agnew, Balduzzi, & Sunden, 2003; Madrian &

Shea, 2001). This literature provides suggestive and illuminating

explanations for stockholding behavior (Aubert, 2006). However,

much of it identifies these explanatory factors from patterns of stock

transactions, often without direct observation of employees and their

motives or attitudes. As a result, the posited reasons for holding large

concentrations of employer stock tend to be based on interpretative

conjecture rather than definitive empirical evidence drawn from

those undertaking the offending behavior.

This article provides new evidence on the extent and anteced-

ents of portfolio concentration in employee stock plans drawing on

extensive attitudinal and behavioral data collected directly from

employees. Our data source is a unique data set constructed from

responses to a questionnaire distributed to current participants in the

United Kingdom Save as You Earn share option scheme. This tax-

advantaged all-employee scheme grants options to employees (who

opt-in) to acquire shares in three or five years, usually at a discount

on grant price, while providing a mechanism for them to accumulate

savings to exercise the options. We focus on a subset of the data

DOI: 10.1002/hrm.21892

Hum Resour Manage. 2018;57:1175–1187. wileyonlinelibrary.com/journal/hrm © 2018 Wiley Periodicals, Inc. 1175