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We used AI to analyze 24 years of retail SEC disclosures – and found the one factor that would have doubled investors’ returns

Jeffrey B. Wenger is director of the RAND Lowy Family Middle-Class Pathways Center. George Zuo, an applied microeconomist, conducts research at RAND on strategies to bridge economic, educational, and health inequalities in the United States.

As economists, we’re often asked for stock tips and advice on how to get rich. We rarely have good answers, but here’s a tip that could pay off in the long run. Investors know that a 7% return doubles an investment every 10 years: $10,000 today could grow to $80,000 in 30 years. A 9% return, however, could turn that same $10,000 into $160,000 over the same period.

So how do you get that extra 2%? Research we’ve done at RAND has found that one way might be to own stocks in companies that make high-quality, meaningful investments in their employees—and particularly their production-line workers.

In 2020, the SEC mandated that publicly traded companies disclose in their annual disclosures their efforts to attract, develop and retain employees. Because corporate value is increasingly tied to knowledge (think software patents and drug licenses), the SEC argued that disclosures needed to be modernized to capture investments in employees—not just inventory, machinery, buildings and land.

Our team of economists at RAND took this opportunity to analyze what happened in the retail sector before and after 2020. Using AI, we analyzed these information-rich SEC disclosures dating back to 2000. In short, we found that retailers’ filings after 2020 contain important insights into how they invest in people—and that this information can often predict stock performance.

Our AI tool distinguished between intelligent, factual statements and corporate babble like, “To support our growth and enhance the guest experience, we will continue to recruit, develop and retain employees at all levels and in all functional areas.” Oh really? You wonder how. In contrast, the high-quality statements our AI identified read more like this one from a major home improvement chain: “Since 2018, the company has invested more than $3 billion in pay and equity increases for field sales associates, including creating new roles that employees can grow into.”

Using this approach, RAND’s AI evaluated how each large publicly traded retailer disclosed its investments in its frontline employees. While many individual investors may not yet have AI available, report provides these ratings along with every excerpt from SEC filings that our AI used to calculate them. We’ve made the full range of disclosures – from the good to the extremely vague – available to anyone who wants to use this information.

We then used this data to measure whether and how stock prices responded. We found that retailers that made clear disclosures about investing in workers saw short-term increases in their stock prices ranging from 2% (within two weeks of disclosure) to 2.5% (within 30 days of disclosure). The results were quite robust, even after accounting for the wide range of financial data included in the SEC filing.

This study is likely to strike a chord in today’s market. Investors are hungry for companies that think long-term, including when it comes to their employees. Companies are also struggling with a talent shortage: front-line workers have gained significantly more power during the pandemic, and opportunities for advancement and working conditions are consistently high on their list of priorities.

It would be helpful if the SEC provided clearer guidelines on how companies should describe their investments in talent. Current disclosure rules allow companies to say a lot without really saying anything. But here’s the bottom line from our findings: Companies that walk the talk and invest in their frontline employees could see a significant boost to their financials if they were clearer and more direct about what they do.

So how do you get rich? If you patiently put your money into companies that invest in their employees and wait 30 years, you’re likely to get twice the return you would otherwise. And you can do it and feel good about it because you’re improving the prospects of retail workers. If you really want to go all out, you can also buy from these profitable, employee-focused retailers – a win-win.

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