Inside Information and the Own Company Stock Puzzle
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.
Download PDF
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.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.