Abstract

U.S. investors allocate 30-40% of their financial asset portfolio in the stock of the company stock they work for. Such a portfolio flies in the face of standard portfolio theory, which prescribes that an investor should hold less of a financial asset that is positively correlated with her undiversified labor income. Nevertheless, we propose a rational explanation that prescribes a long position in own company stock. Precisely because the own company stock is positively correlated with the investor's labor income, any information the investor learns about her earnings is a partial information advantage in her own company stock. When confronted with a choice of what information to acquire, employees may choose to learn about their own firm. Learning lowers the employee's risk of holding own-firm equity, which raises its risk-adjusted returns and makes a long position optimal.

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Citation

Van Nieuwerburgh, Stijn, and Laura Veldkamp. "Inside Information and the Own Company Stock Puzzle." Journal of the European Economic Association 4, no. 2-3 (May 2006): 623-633.

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