Companies with large numbers of scientists and engineers are riskier for investors, new research finds
A highly skilled workforce of scientists and engineers can improve business performance, but make it a riskier investment in the stock market, study finds.
Indeed, companies with large numbers of scientists and engineers are more inflexible because they are expensive to employ but too large to be laid off, the British Academy of Management’s annual online conference said today.
Three researchers from Leeds University Business School analyzed data from 1997 to 2018 on 14,786 companies in 16 countries, including the UK, that were publicly traded.
Dr Chieh Lin, Professor Steven Toms and Professor Iain Clacher examined the share of salaries – the percentage of total payroll – spent on personnel working in science, technology, engineers or mathematics, known as name of STEM workers, in 269 industries, such as transportation. , manufacturing and education.
They found that in industries where companies spent more of their payrolls on STEM workers, the stock market value of companies was more volatile.
Firm âbeta metricsâ increased in industries where more STEM workers were employed. Beta is a measure of a stock’s volatility relative to the overall market, where a stock that swings more than the market over time has a beta greater than 1.0.
On average, an additional 20% of the payroll spent on STEM workers was linked to an increase in beta from 9% to 17%.
Additionally, corporate profits became more sensitive to changes in their sales income as the business relied more on STEM workers. Because of this uncertainty, corporate investors demanded a higher return.
STEM workers cost more but are often too large to be made redundant, making companies immune to downturns. The average STEM worker earns $ 91,000, compared to $ 47,000 for non-STEM staff. STEM workers make up about 13% of the total workforce and 23% of total wages and salaries in the United States.
âSTEM workers are at the center of the global competition for talent due to their ability to take advantage of advanced technologies efficiently and productively,â Dr Lin said at the conference.
âWhile the contribution of STEM workers to high value-added activities such as R&D and innovation, and therefore growth, is generally emphasized, limited attention has been paid to the risk that a workforce will STEM-intensive can result for individual businesses.
âWe argue that the use of STEM workers reduces the operational flexibility of companies by increasing the degree of fixity of labor costs, and therefore of total operating costs.
âThe operating leverage thus created increases the volatility of cash flows as they become more exposed to systematic risk. The risk associated with employing STEM workers must be weighed against their contribution to innovation and growth.
âInvesting in STEM workers magnifies both downside risk and upside potential for firms, but the first effect is more dominant.
âStocks of labor-intensive STEM companies are riskier due to higher exposure to systematic risk. Investors demand a high return on stocks of labor-intensive STEM companies to offset higher exposure to systematic risk. “
Dr Lin said that while stocks of STEM-intensive companies are risky investments in general, exceptions such as Amazon and other tech giants are possible given their robust business models.