Employee Flexibility, Exogenous Risk, and Firm Value

We hypothesize that employee flexibility enhances firm value by helping firms respond to exogenous shocks. We estimate employee flexibility scores through textual analysis of online job reviews, and find a high flexibility score leads to superior stock returns for firms exposed to external risk. During 2011-2017, the value-weighted hedge portfolio formed on employee flexibility earned a five-factor annualized alpha of 9.5% during periods of high policy uncertainty. Earnings announcement returns also suggest that investors do not fully value workforce flexibility. These results indicate that employee flexibility is a valuable corporate intangible that helps firms to manage risk during uncertain times.

Keywords: employee flexibility, exogenous risk, intangibles, stock returns, textual analysis

JEL Classification: G30, G34, D22, M14

Suggested Citation: Suggested Citation

Au, Shiu-Yik and Dong, Ming and Tremblay, Andreanne, Employee Flexibility, Exogenous Risk, and Firm Value (October 30, 2019). Journal of Financial and Quantitative Analysis (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2883353 or http://dx.doi.org/10.2139/ssrn.2883353