Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World

66 Pages Posted: 2 Jul 2014 Last revised: 11 Aug 2020

See all articles by Alex Edmans

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Lucius Li

KFUPM Business School

Chendi Zhang

University of Exeter Business School

Multiple version iconThere are 3 versions of this paper

Date Written: April 27, 2020

Abstract

We study the relationship between employee satisfaction and stock returns across 30 countries. Employee satisfaction is associated with superior long-run returns in flexible labor markets, such as the US and UK, but not rigid labor markets, such as Germany. Similar results hold for current valuation ratios, future profitability, and future earnings surprises, inconsistent with an omitted risk explanation and identifying channels through which employee satisfaction may affect stock returns. These results are consistent with employee satisfaction improving recruitment, retention, and motivation in flexible labor markets, where firms face fewer constraints on hiring and firing and employees have greater ability to respond to higher satisfaction. The findings have implications for the differential profitability of socially responsible investing strategies around the world – in particular, the importance of considering institutional factors when forming such strategies.

Keywords: Employee Satisfaction, Labor Market Flexibility, Socially Responsible Investing, Corporate Social Responsibility

JEL Classification: G12, G23, G38, J53, J81, J83, J88, K31

Suggested Citation

Edmans, Alex and Li, Lucius and Zhang, Chendi, Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World (April 27, 2020). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 433/2014, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2461003 or http://dx.doi.org/10.2139/ssrn.2461003

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

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European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lucius Li

KFUPM Business School ( email )

P.O. Box 5075
KFUPM
Dhahran, Easetern Province 31261
Saudi Arabia

Chendi Zhang

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

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