Learning from Coworkers: Peer Effects on Individual Investment Decisions

• DOI: http://doi.org/10.1111/jofi.12830
• Date: 01 February 2020
• Published date: 01 February 2020
• Author: PAIGE OUIMET,GEOFFREY TATE

THE JOURNAL OF FINANCE •VOL. LXXV, NO. 1 •FEBRUARY 2020

Learning from Coworkers: Peer Effects on

Individual Investment Decisions

PAIGE OUIMET and GEOFFREY TATE∗

ABSTRACT

Using unique data on employee stock purchase plans (ESPPs), we examine the influ-

ence of networks on investment decisions. Comparing employees within a firm during

the same election window with metro area fixed effects, we find that the choices of

coworkers in the firm’s ESPP exert a significant influence on employees’ own decisions

to participate and trade. Moreover, we find that the presence of high-information em-

ployees magnifies the effects of peer networks. Given participation in an ESPP is

value-maximizing, our analysis suggests the potential of networks and targeted in-

vestor education to improve financial decision-making.

HOW DO PEOPLE LEARN ABOUT INVESTMENTS? Prior research provides extensive

evidence that individuals who choose to open retail brokerage accounts do not

always make wise investment choices (e.g., Barber and Odean (2013)). For

many individuals, however, their primary exposure to financial investments is

through employer-sponsored plans into which they do not directly self-select.

These investors could be even less experienced and more prone to mistakes than

the average retail investor. Alternatively, workplace networks could provide

conduits through which employees learn, resulting in better decision-making.

We use novel panel data on employee decisions within employee stock pur-

chase plans (ESPPs) to examine how financial information spreads through

employee networks. We document participation rates of only 43%, on average,

among firms in our sample, even though employees forgo significant monetary

gains by not participating. However, information from peers reduces under-

participation. We find that the contemporaneous choice to participate among

peers in the same office has a significant effect on employees’ own participation

choices. Economically, a 10 percentage point increase in local participation is

∗Paige Ouimet is at the Kenan-Flagler Business School, University of North Carolina. Geoffrey

Tate is at the Robert H. Smith School of Business, University of Maryland. Wethank Richard Free-

man; Rawley Heimer; Stefan Nagel (Editor); Stephen Shore; Johannes Stroebel; Ed Van Wesep;

two anonymous referees; conference participants at the 2019 American Finance Association An-

nual Meeting, 2018 Colorado Front Range Finance Seminar, 2018 CEAR-RSI Household Finance

Workshop, 2018 Kelso workshop, 2018 China International Finance Conference, and Third An-

nual “Smokey” Mountain Finance Conference; and seminar participants at Cornell, Georgia State,

Maryland, Notre Dame, Shanghai Institute of Advanced Finance, Tsinghua PBC, and Vanderbilt

for helpful comments. We have read the Journal of Finance’s disclosure policy and have no conflict

of interest to disclose.

DOI: 10.1111/jofi.12830

C2019 the American Finance Association

133

134 The Journal of Finance R

associated with a 1.5 percentage point increase in the likelihood a worker will

choose to participate. Moreover, we find that these peer effects are consistent

with rational responses to information flowing through the employee network:

peer effects are weaker among workers who are likely to be uninformed when

there are no informed colleagues in their offices. Finally, we find that peers

influence not only the choice to participate in an ESPP, but also the choice of

when to sell shares acquired in the plan conditional on participating.

People’s decisions are likely to be influenced by those with whom they in-

teract. For instance, social network connections can serve as conduits for

the flow of information between individuals (Ellison and Fudenberg (1995),

Banerjee (1992), Bikhchandani, Hirshleifer, and Welch (1992)). Alternatively,

preferences that weight relative differences between an individual’s own con-

sumption and the consumption of her peers, can cause her to mimic external

consumption patterns in order to “keep up with the Joneses” (Abel (1990), Bern-

heim (1994)). Models of both types predict heightened conformity of choices

within peer groups compared to the general population.

ESPPs have several features that make them a useful context in which not

only to measure peer influence, but also to explore the economic mechanisms

that could generate these effects. First, the decisions faced by different indi-

viduals within a firm’s plan are the same. All employees simultaneously face

the same participation choice given an identical set of plan properties.1Un-

like other employer-sponsored plans such as 401(k)s, all employees hold the

same financial security conditional on participating (company stock) and thus

their selling decisions are affected by the same fundamental information. This

commonality facilitates cross-individual comparisons and maximizes the rele-

vance of information that can be transferred between individuals. Second, all

purchases of stock within an election window occur on a prescheduled purchase

date, providing a focal point for employee sales that is unlikely to be related to

information about fundamentals and that makes peer influence easier to de-

tect statistically. Third, failure to participate implies a value loss to employees

because shares within ESPPs are purchased at a discount from current market

prices and plans typically do not place restrictions on the timing of sales. We

can therefore make clear statements about the value implications of employ-

ees’ choices, which allows us to distinguish between learning and uninformed

mimicry.

An immediate challenge for our analysis is to separate the effect of peer

decisions on employee choices from the effects of selection and exposure to

common shocks (Manski (1993)). To address this concern, we exploit a unique

feature of our data relative to other samples of investor trading decisions used

in prior research; namely, the inclusion of worker-firm matches. Many prior

studies define peer groups using the locations in which people reside, but as

a result face the challenge of separating peer effects from the effects of local

1The only difference between employees is the maximum size of participation allowed, which

is typically based on a fraction of pay. Most firms also have a hard ceiling on the maximum

participation allowed, which limits participation for high-income employees.

Learning from Coworkers 135

shocks. We instead define an individual’speer group (or network) by identifying

workers within a metropolitan area (core-based statistical area, or CBSA) who

work for the same firm. In all of our regressions, we include CBSA-month fixed

effects to remove the influence of shocks to the local economy that might be

correlated with the investment decisions of investors living in the metropolitan

area. Of course, coworkers in a firm may also be subject to common firm-level

shocks. To account for these shocks, we also include firm-month fixed effects.

We therefore compare each worker’s decision to participate (or trade) to the

simultaneous decisions of other workers in the same firm. The fixed effects

capture shocks (such as shocks to the value of company stock) that are common

to all investors in the plan. Our identification comes from differences in the

behavior of groups of workers within the firm who are located in different

metropolitan areas after controlling for location-wide trends. We also include

controls for observable worker traits such as gender, age, and income.

We conduct several supplementary analyses to address remaining identifica-

tion concerns (e.g., workers in different offices within a firm could be subject to

different shocks that are not captured by the location or demographic controls).

First, we use a strategy similar to Duflo and Saez (2002) and Case and Katz

(1991) to construct instruments for average peer choices that exploit variation

in average employee demographics across firm locations. In our setting, the

exclusion restriction requires that the distribution of employee characteristics

at a local office does not directly influence employees’ ESPP decisions, after

controlling for their own traits. This assumption could fail if, for example, men

in an office that primarily employs men make different ESPP choices from men

in an office with a gender distribution closer to the firm norm. Although we can-

not test the exclusion restriction directly,we run a number of tests that support

our identifying assumption. We show that our results are generally insensitive

to omitting offices with extreme distributions of observable characteristics that

might result from endogenous sorting of workers to offices, such as offices that

employ a disproportionate number of men or employees in finance occupations.

Moreover, we show that estimates of within-office heterogeneity in the effect of

peers on ESPP choices are largely invariant to the inclusion of fixed effects for

firm-CBSA-month groups, which directly capture the effects of both office-level

sorting and shocks. We also show that our results are stronger in settings in

which we would predict stronger peer influence a priori; for example, when

recent participants in the ESPP experienced abnormally large gains.

Although our baseline analysis establishes a robust influence of local col-

leagues on workers’ decisions to participate in their firms’ ESPPs, suggesting

that peer networks could be a mechanism through which workers obtain in-

vestment information, some of this effect could come from uninformed mimicry.

To provide additional evidence that learning also plays a key role, we begin by

constructing three proxies to distinguish between employees who are likely

to be initially informed versus uninformed about financial decision-making

within ESPPs. First, we identify employees who work in occupations likely to

be associated with a high level of general knowledge about financial products

(finance, accounting, and engineering) or with a high level of knowledge about