55 Pages Posted: 2 Jul 2014 Last revised: 22 Feb 2017
Date Written: February 21, 2017
We study the relationship between employee satisfaction and firm performance around the world, using lists of the “Best Companies to Work For” in 14 countries. Employee satisfaction is associated with superior long-run returns, current valuation ratios, future profitability, and earnings surprises in flexible labor markets, such as the US and UK, but not rigid labor markets, such as Germany. 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. In rigid labor markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns. 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: Suggested Citation
Edmans, Alex and Li, Lucius and Zhang, Chendi, Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World (February 21, 2017). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 433/2014. Available at SSRN: https://ssrn.com/abstract=2461003 or http://dx.doi.org/10.2139/ssrn.2461003