Employee Treatment and Firm Innovation
Journal of Business Finance & Accounting, Forthcoming
44 Pages Posted: 22 Aug 2015 Last revised: 24 May 2019
Date Written: April 30, 2019
We identify firm innovation as a channel through which the treatment of employees affects firm value. Long-term incentive theory supports positive effects of “good” employee treatment on innovation. Alternatively, entrenchment theory suggests such treatment will lead to complacency and shirking, hence deterring innovation. These opposing views merit investigation since human capital is increasingly essential to the growth and success of a firm. Using the KLD database and patent/citation data, we find a significant positive relationship between favorable employee treatment and the innovation quantity and quality of a firm. Furthermore, we find that the positive treatment of employees improves innovation focus—more innovation related to firms’ core business, leading to greater firm value via the increased economic value of patents. These findings, robust to endogeneity concerns, provide support for the long-term incentive hypothesis, suggesting that well-treated employees increase firm innovation. Thus, firm innovation represents a channel through which positive employee treatment enhances firm value.
Keywords: Employee treatment, human capital, corporate social responsibility (CSR), patents and citations, technological innovation
JEL Classification: G3, J24, M14, O31
Suggested Citation: Suggested Citation