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

55 Pages Posted: 2 Jul 2014 Last revised: 22 Feb 2017

Alex Edmans

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

Lucius Li

Department of Finance, London School of Economics; University of Warwick - Finance Group

Chendi Zhang

University of Warwick - Finance Group

Multiple version iconThere are 3 versions of this paper

Date Written: February 21, 2017

Abstract

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

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

Alex Edmans (Contact Author)

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

Sussex Place
Regent's Park
London NW1 4SA
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European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Lucius Li

Department of Finance, London School of Economics ( email )

LSE
Houghton Street
London, WC2A 2AE
United Kingdom
+44(0)2079556857 (Phone)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
West Midlands, CV4 7AL
United Kingdom

Chendi Zhang

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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