Professional Investor Use of Human Capital Management Information

See Intervention (Hidden)

2024-05-13

2024-06-14

The answers to Question 2 are our primary outcomes of interest.

The answers to Question 2 will be the discount rates estimated by respondents given the required return on equity that they estimate via the CAPM and the additional firm-specific information provided to them. These outcomes will be numbers from 0% to 30%, in intervals of 0.1%.

The answers to Question 1, Question 3, Question 4, and additional survey questions.

Question 1: Answers to this question will provide a data quality check to determine (i) whether respondents are thoughtfully and carefully responding to questions and (ii) whether respondents have the practical knowledge necessary to provide meaningful answers to Question 2 and 3. These outcomes will be numbers from 0% to 30%, in intervals of 0.1%.

Question 3: Answers to this question will provide an alternative means to estimating treatment effects based on respondents’ perceptions of how other CFA members would use the firm-specific information in their valuation decisions. These outcomes will be numbers from 0% to 30%, in intervals of 0.1%.

Question 4: This question will explicitly ask participants how influential each individual piece of firm-specific information was in their estimation of a discount rate in Question 2. They will be asked the following: “When using the Expanded CAPM to determine ABC's required return on equity in Question #2, by incorporating the additional company-specific information, how did each of the following pieces of information influence your estimate of ABC's required return on equity?” They will answer using a five-point Likert scale from “Large Negative Influence” to “Large Positive Influence.” We will also ask participants how they felt each piece of information influenced others’ estimates of ABC’s required return on equity.

We will also ask respondents how certain they are of their answers to Questions 1-3, which will help us gauge the quality of each individual’s response data.

Regarding the questions about the sources of information they use (or would use, hypothetically, if accessible) when they perform financial analysis and make investment decisions, these will be presented as statements to which respondents will indicate their level of agreement/disagreement.

Regarding the types of human capital management information that they would most want regulators to require firms to disclose, we will present them with different types of disclosures that they can vote on (allocating 100 votes however they’d like).

Responses to the remaining questions will be used to estimate treatment effect heterogeneity across particular groups. Specifically, based on respondent age, gender, race/ethnicity, work experience, and political/ideological leanings (conditional on the CFA being able to link this information to each response).

See Experimental Design (Hidden)

Participants, all CFA members, will be asked to complete multiple questions that are adaptations of questions from the CFA exam. Question 1 will ask them to use the Capital Asset Pricing Model (CAPM) to estimate the company’s discount rate (i.e., required return on equity). They will be provided with the CAPM formula, along with the three pieces of information necessary to perform the calculation: (i) the risk-free rate, (ii) the company’s beta, and (iii) the equity risk premium.

In Question 2, they will be provided with additional company-specific information, and they will be asked to use this information and the Expanded CAPM approach to estimate a reasonable discount rate for the company. They will be provided with general instructions about how to use the Expanded CAPM approach. All participants will be provided with information about the company’s size, which is a common risk factor used when estimating a discount rate, and number of employees. They will also all be provided with information about the experience level of the company’s managers, which is used as a risk factor in some CFA exam questions.

There will be nine different versions of Question 2. Each participant will be randomly sorted into seeing one of the nine versions via the Qualtrics embedded randomization functionality, either the control or one of eight possible treatments:

- Control - No additional firm-specific information will be shared

In each of the treatments, one additional firm-specific detail will be shared:

- Workforce Diversity/Low - The firm’s workforce has gender diversity below the industry average.
- Workforce Diversity/High - The firm’s workforce has gender diversity above the industry average.
- Employee Turnover/Low - The firm’s yearly employee turnover level is below the industry average.
- Employee Turnover/High - The firm’s yearly employee turnover level is above the industry average.
- Temporary Workers/Low - The fraction of the firm’s employees that are temporary or contract workers is below the industry average.
- Temporary Workers/High - The fraction of the firm’s employees that are temporary or contract workers is above the industry average.
- Employee Expenses/Low - The firm’s total amount of employee-related expenses (i.e., payroll) per employee is below the industry average.
- Employee Expenses/High - The firm’s total amount of employee-related expenses (i.e., payroll) per employee is above the industry average.

Using the information provided to them, each individual will be asked to use the Expanded CAPM approach to estimate a reasonable discount rate for the company. Images of the survey instrument are provided in the supplementary material of the pre-registration.

After answering Question 2, each participant will be asked to think about the discount rates that other CFA members are likely to estimate, given the same information that the participant was exposed to. For Question 3, participants will be asked to give their best estimate as to what the consensus estimate is likely to be (i.e., their best guess of the average estimate across all survey respondents who answered the same Question #2 as they did).

In Question 4, participants will be explicitly asked how influential each individual piece of firm-specific information was in their estimation of a discount rate in Question 2. They will be asked the following: “When using the Expanded CAPM to determine ABC's required return on equity in Question #2, by incorporating the additional company-specific information, how did each of the following pieces of information influence your estimate of ABC's required return on equity?” They will answer using a five-point Likert scale from “Large Negative Influence” to “Large Positive Influence.” We will also ask participants how they felt each piece of information influenced others’ estimates of ABC’s required return on equity.

The remainder of the survey will ask them to answer questions about the following:

- The sources of information they use (or would use, hypothetically, if accessible) when they perform financial analysis and make investment decisions.
- The types of human capital management information that they would most want regulators to require firms to disclose.
- How their analyses and estimations of firm value would be influenced/affected by information about employee turnover, workforce diversity, the use of temporary/contract workers, and the average wage expense per employee (via free-response entries).
- Their demographic characteristics and their experience in investment analysis/wealth management.

Qualtrics randomization functionality

Individual

No

2,000 CFA Members

2,000 CFA Members

2,000 CFA Members

Using Stata command power x, diff(y) sd1(s1) sd2(s2), which computes the total sample size required to detect an experimental-group mean that’s y units different from the control-group mean of x. This test assumes that the standard deviations of the two groups are s2 and s1, respectively, that a two-sided test with a 5% significance level will be used, a power of 80%, and that both groups will have the same number of observations (the defaults). In this case, x would capture the average required return on equity reported in Question 2 by individuals in the control group, and y would capture the difference from this mean among agents in a particular treatment group. power twomeans .09, diff(.03) sd1(.050) sd2(.050): N per group = 45 power twomeans .09, diff(.03) sd1(.045) sd2(.045): N per group = 37 power twomeans .09, diff(.03) sd1(.040) sd2(.040): N per group = 29 power twomeans .09, diff(.03) sd1(.035) sd2(.035): N per group = 23 power twomeans .09, diff(.02) sd1(.050) sd2(.050): N per group = 100 power twomeans .09, diff(.02) sd1(.045) sd2(.045): N per group = 81 power twomeans .09, diff(.02) sd1(.040) sd2(.040): N per group = 64 power twomeans .09, diff(.02) sd1(.035) sd2(.035): N per group = 50 power twomeans .09, diff(.01) sd1(.050) sd2(.050): N per group = 394 power twomeans .09, diff(.01) sd1(.045) sd2(.045): N per group = 319 power twomeans .09, diff(.01) sd1(.040) sd2(.040): N per group = 253 power twomeans .09, diff(.01) sd1(.035) sd2(.035): N per group = 194 Note: these power calculations hold for different values of x, e.g., x = 6, 7, 8, 9, 10, 11, 12, etc.