Understanding employee preferences for investing in employer stock: evidence from France

• Date: 01 November 2014
• Published date: 01 November 2014
• Author: Marco Caramelli,Edward J. Carberry
• DOI: http://doi.org/10.1111/1748-8583.12057

Understanding employee preferences for investing

in employer stock: evidence from France

Marco Caramelli, INSEEC Business School

Edward J. Carberry, College of Management, University of Massachusetts Boston

Human Resource Management Journal, Vol 24, no 4, 2014, pages 548–566

In this article, we broaden the focus of existing research on employee stock purchase plans by analysing

employee preferences for investing in employer stock as a construct distinct from actual investment

behaviour. In our analysis of original survey data in a sample of 900 employees in four French companies,

we find that employee preferences are influenced by two common cognitive heuristics (representativeness

and familiarity), organisational commitment, the perceived quality of corporate communications about

these plans and perceived managerial commitment to employee ownership. We did not find, however, that

risk aversion, turnover intentions or perceived employee involvement in decision making influenced

preferences for investing in employer stock. Our findings have both theoretical and practical implications

for understanding and operating these types of employee benefit plans, which are becoming more common

across the globe.

Contact: Marco Caramelli, INSEEC Business School, 27, Avenue Claude Vellefaux, 75010 Paris,

France. Email: mcaramelli@groupeinseec.com

Keywords: employee ownership; employee investment behaviour; employee work attitudes

INTRODUCTION

The use of employee ownership (EO) plans continues to increase in a number of regions

across the globe, including Europe (EFES, 2011), the US (NCEO, 2013) and China (Chiu,

2003; Chiu et al., 2007). Although plans in which a trust acquires large blocks of stock that

are allocated to most or all employees remain prevalent (e.g. employee stock ownership plans

in the US and similar plans in the UK), the incidence of defined contribution saving plans in

which employer stock is an investment option and investment decisions are made by

employees continues to increase (Benartzi and Thaler, 2002; Kaarsemaker et al., 2009). Such

plans, which we refer to as employee purchase plans (EPPs), have become particularly common

in Western capitalist economies. In the US, for example, 401(k) plans, which allow a company

to provide its own stock as an investment option or as a way to match employee investments,

are the most common form of EO in publicly traded companies (NCEO, 2013). The popular

Save As You Earn plan in the UK is a combined savings and stock option plan in which

employees decide how much to invest and the length of the savings period. In France, there

are multiple mechanisms through which employees can purchase employer stock and make

their own decisions about whether and how much to invest. The use of these plans is also

increasing outside of Western economies, such as in South Korea and Taiwan (Cin et al., 2003).

The growing popularity of EPPs raises a number of questions for HR scholars and

practitioners, particularly relating to the benefits and risks of these plans. For example,

although top managers often make the decision to implement EPPs, employees can be asked

to make decisions about whether or not to participate in these plans, how many shares to

purchase, and the proportion of their money that goes into employer shares relative to other

investments. Firms often establish EPPs to provide employees with a benefit and because they

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doi: 10.1111/1748-8583.12057

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 4, 2014548

© 2014 John Wiley & Sons Ltd.

Please cite this article in press as: Caramelli, M. and Carberry, E.J. (2014) ‘Understanding employee preferences for investing in employer stock:

evidence from France’. Human Resource Management Journal 24: 4, 548–566.

believe that EO will align the interests of employees and shareholders, leading to improved

work attitudes and corporate performance. Although EO can provide firms with a powerful

competitive advantage under certain conditions (Blasi et al., 2010a), EPPs have potential

downsides. A number of studies, for example, have shown that a significant percentage of

employees participating in these plans have portfolios with high concentrations of employer

stock (Benartzi, 2001; Meulbroek, 2005; Blasi et al., 2010b; Pendleton, 2010b). In US 401(k) plans,

for example, it is common for employees to have large percentages of their retirement savings

in employer stock (Benartzi et al., 2007). In the UK, a quarter of employee shareholders report

that they hold half or more of their savings in company shares (Pendleton, 2010b). In France,

38 per cent of the total amount of funds allocated in French employee saving plans were held

in EO funds in 2012 (AFG, 2012).

When employee investments are highly concentrated in employer stock, employees attach

not only their wage-earning futures to the fate of the company,but also their investment income

and retirement benefits, putting them in an extremely risky financial position. Moreover, many

employees do not have sophisticated knowledge about investing in general, which places them

at a disadvantage in making investment decisions. To better understand employee investment

patterns, studies of EPPs conducted in the US, France and the UK have examined individual-

and organisational-level factors that influence investment behaviour. Benartzi (2001), for

example, found that past stock price performance was associated with higher concentrations of

employer stock, and Benartzi and Thaler (2001, 2007) argued that cognitive heuristics that

influence organisational behaviour generally may be driving such concentrations. Other studies

have demonstrated the influence of factors predicted by the neoclassical model of investing,

such as age, income, wealth, and risk aversion, on employee participation in EPPs and the size

of their contributions (Degeorge et al., 2004; Pendleton, 2010a). In addition, although Aubert

and Rapp (2010) found that employees with higher levels of firm-specific human capital and

education have higher concentrations in EPPs, Degeorge et al. (2004) found few effects of

firm-specific human capital. Finally, Pendleton (2010a) found that a key workplace attitude,

organisational commitment, was positively associated with concentration of ownership of

employer stock, but in another study Pendleton (2010b) found that commitment was not related

to participation.

With the exception of these last two studies, the literature on employee investing has focused

primarily on factors that shape investing behaviour generally. However, employee decisions to

invest through EPPs are likely influenced by factors unique to the context of EO. For example,

EPPs often provide preferential tax treatment relative to other investments, a discount on the

purchase price and the presence of matching contributions from the company. These plan

design features can balance out the risks of under-diversification and lead employees to prefer

investing in employer stock relative to other investments, and therefore to higher

concentrations of employer stock in employee portfolios. In addition, by educating employees

about the investment opportunity, firms can increase both the desirability of employer stock as

an investment option and employee preferences for investing in it. Finally, employees often

respond positively to EO, particularly if it is accompanied by increased opportunities to

participate in decision making (Klein and Hall, 1988; Gamble et al., 2002; Rousseau and

Shperling, 2003). These positive reactions can also increase the desirability of employer stock

and employee preferences for it as an investment option.

Investing in employer stock, therefore, is a unique investment context that highlights the

importance of distinct employee attitudes towards investing in employer stock, or what we call

preferences for employer stock. In its focus on investment behaviour, however, existing studies

of EPPs have neglected these preferences. In this article, we broaden the focus of the literature

Marco Caramelli and Edward J. Carberry

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 4, 2014 549

© 2014 John Wiley & Sons Ltd.