Investors Anticipate Automation Impact on Employment with Stock Prices

As artificial intelligence becomes more prevalent in the economy, there is a growing need to distinguish the winners from the losers. This task extends far beyond just Nvidia Corp. and Microsoft Corp. in the stock market.

A trio of researchers say companies whose workforces are ripe for AI streamlining are doing something interesting in the market: beating them. Andrea L. Eisfeldt and Gregor Schubert of the University of California, Los Angeles, and Miao Ben Zhang of the University of Southern California, in their study “Generative AI and Firm Values,” attempt to quantify the shock waves caused by the ChatGPT program.

While the idea of artificial intelligence contributing to stock returns isn’t news to anyone who’s watched the Nasdaq 100 rise 44 percent in 2023, the paper’s conclusions go further. They describe a market under which extensive assessments have already been made about how automation will affect things like cash flows and stock valuations as intelligent systems condense into production tools.

“Professional investors are making educated guesses about who will benefit from labor efficiency when technology replaces people,” said PRSPCTV Capital LLC treasurer Lawrence Creatura, speaking generally rather than specifics of the study. “This is just a repeat of the industrial revolution. Machines are taking over tasks that people used to do.”

There are many caveats to such a study, starting with the shortness of the review period – only eight months. Another could be the way the authors figured out which jobs are susceptible to AI intercession: they asked an AI chatbot to tell them.

After gaining access to a database of 19,000 job postings, along with data retrieved from LinkedIn and incoming calls, the robo-oracle sent back a ranking of risky jobs in the white-collar field. Financial, specialist and technology companies scored highly when measuring “their workforce’s exposure to the productivity of tools like ChatGPT,” the authors say.

According to researchers studying the impact of artificial intelligence on the economy, there was evidence that investors had already smelled this feature. The team found that companies whose jobs are in the eyes of artificial intelligence have outperformed the market by a statistically significant margin.

“Our key finding is that the arrival of ChatGPT had a significant positive impact on the value of firms whose workforces are more exposed to generative AI and related large language models,” the authors wrote.

Possible red flags

Is it crazy to assume that, in a few short months, investors would have flocked in droves to a specific trade highlighted in the study: buying companies ready for AI automation? No, Schubert says in the interview – although the process doesn’t have to be conscious.

“Some traders have implicitly or explicitly assessed that some companies are more likely to implement these productivity gains than others,” he said, adding that while ChatGPT is new, AI-powered automation is not.

“There were already a lot of investors who were focused on which companies were most susceptible to changes in AI technology and that ChatGPT represented a leap in capability, but they already had research or insights into what companies would generally benefit from,” he said.

In the two weeks following ChatGPT’s release in November, the stock prices of companies with the highest exposure to AI rose 0.4% more daily than those with less exposure. The cumulative increase of about four months following the launch of ChatGPT was more than 9%.

The researchers found about 2,500 publicly traded companies. Three of the 10 companies most exposed to artificial intelligence are chipmakers — Broadcom Inc., Qualcomm Inc. and Nvidia. The other is Microsoft. which develops its own product line of companies’ artificial intelligence products.

But the impact of AI exposure on stock values across industries, suggesting that the perceived impact is more than just tech companies and chipmakers. For example, insurance companies that are more exposed to generative AI continued to show significantly more share price gains than their peers with lower exposure.

On the surface, the findings sound like further evidence of impending job replacement — fueling the idea that companies are laying off workers and hiring chatbots on the cheap instead. But Schubert—a UCLA economist and one of the study’s authors—proposed an alternative theory: If large language models did some of the cognitive grunt work, humans would have more time to complete tasks that AI can’t. In this scenario, companies become more productive, people keep their jobs. and the stock prices of AI-savvy companies swell.

“From a business perspective, this is all about increasing productivity,” Schubert said in an interview. “If the task is completed faster, the company becomes more productive, and it creates added value for them. The fact that the employee remains in place to do the task is in a way irrelevant in terms of productivity growth.”

Ironically, researchers like Schubert do some of the cognitive, repetitive work that AI is ready to do, which is why it was decided to use it in the study. To sift through the roughly 19,000 tasks, the economists could have hired a research assistant or gig workers—both options would have required a lot of money and a lot of time.

Or they can use ChatGPT, which completed the assigned task in less than two days for little or no cost.

“It actually turned out to be the best tool for the job,” Schubert admits.