Return Cross-Predictability in Firms with Similar Employee Satisfaction
60 Pages Posted: 16 Oct 2019 Last revised: 24 Mar 2020
Date Written: October 15, 2019
We study the return predictability of similar employee satisfaction (SES) firms using new firm-ranking data of employee satisfaction from Glassdoor. We find that the returns of firm peers with SES have a predictive power for focal firm returns. A long-short portfolio sorted on the lagged returns of SES firm peers yields a significant Fama and French (2018) six-factor alpha of 135 bps per month. This result is distinct from industry and inter-firm momentum effects and cannot be explained by risk-based arguments. Our tests suggest that investors’ limited attention is the primary reason of firms’ underreaction to their SES firm returns.
Keywords: Earnings announcements, Employment growth, Limits to Arbitrage, Market efficiency
JEL Classification: G11, G14, G15
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