Office Hours: Xiaofei Zhao on the Effect of Increased Labor Force Telework Flexibility Due to the Covid-19 Pandemic

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As companies continue to adapt to remote work, labor force telework flexibility has become a popular arrangement for employees. Information and communication technologies, in particular, have advanced dramatically in the virtual workplace. Xiaofei Zhao, associate professor of finance, describes this shift in his latest co-authored paper, “Labor Force Telework Flexibility and Asset Prices: Evidence from the Covid-19 Pandemic,” where he identified a strong correlation between increased labor force telework flexibility and financial success among firms. 

Can you synthesize your most recent findings from your paper “Labor Force Telework Flexibility and Asset Prices: Evidence from the COVID-19 Pandemic”?

In this paper, we provide a labor force telework flexibility (LFTF) measure based on job characteristics and industry job compositions for the U.S. industries. We find that LFTF has a very strong effect in driving the stock returns and firm policies during the Covid-19 pandemic, and the information and communication technologies (ICT) component of our measure matters the most. In addition to the empirical analysis, we also provide an economic model to explain the findings, in which cross-industry differences in job task flexibility, labor productivity, and the aggregate uncertainty on when we recover from the pandemic are key factors. 

How does LFTF correlate with the stock returns of firms with publicly traded stocks? 

Firms in industries with high LFTF outperform firms in low LFTF industries in the range of 10-20% in stock returns between January and May 2020. This result is very robust. We apply the same LFTF measures based on the U.S. data to publicly-traded firms in 20 other countries (including other G7 countries) and find that this observation holds true there as well.

What are the main driving forces of this result?

The main driving forces are the cross-industry differences in job task flexibility. This difference, together with the aggregate labor productivity shock and uncertainty we face during the pandemic, amplifies the stock return differences across the industries. From an investor’s perspective, they are more willing to buy stocks in firms that can maintain their normal operations (because of their flexibility) and such firms’ stock prices would hold up more than other firms that lack the flexibility to maintain operations during the pandemic. In addition, the uncertainty of when we will be out of the pandemic makes the cross-firm or cross-industry valuation differences even bigger. 

How has the global pandemic influenced this phenomenon between telework flexibility and stock returns?

The most direct role of the global pandemic is the creation of a shock that impacts the effectiveness of products and services associated with in-person contact. In other words, some industries are disproportionately affected by the pandemic when shifting to telework is difficult. At the same time, other industries can continue operations with telework and are less impacted by the pandemic. When we look into the cross-country differences of the pandemic, we find that this phenomenon is much more pronounced in countries where the pandemic severity is higher (measured by either the infection or death rate per 100K population).  

How should firms implement these findings to increase returns?

Our results suggest that post-pandemic, investors and firms are likely to account for shocks that disrupt work activities in their traditional workplace. One implication is that developing the infrastructure of ICT for telework is a viable channel to mitigate such operational risks and thereby improve the firm valuation. For the public sector, the Telework Enhancement Act of 2010 was set in place to ensure the federal government’s ability to achieve greater flexibility in managing its workforce through the use of telework.