Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices

Abstract:     
This paper analyzes the relationship between employee satisfaction and long-run stock returns. A portfolio of the "100 Best Companies to Work For in America" earned an annual four-factor alpha of 4% from 1984-2005. The portfolio also outperformed industry- and characteristics-matched benchmarks, and the results are robust to the removal of outliers and other methodological changes. Returns are even higher in the 1998-2005 sub-period, even though the list was widely publicized by Fortune magazine. The Best Companies also exhibited significantly more positive earnings surprises and stronger earnings announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent excessive non-pecuniary compensation. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing ("SRI") screens may improve investment returns.

Keywords: Employee satisfaction, intangibles, market efficiency, short-termism, managerial myopia, human capital, human resource management, socially responsible investing

JEL Classifications: G14, J28, M14

Working Paper Series