Employee Treatment and Firm Innovation

26 Pages Posted: 27 May 2020

See all articles by Connie X. Mao

Connie X. Mao

Temple University - Fox School of Business and Management; Temple University - Department of Finance

Jamie Weathers

Western Michigan University - Finance & Commercial Law

Multiple version iconThere are 2 versions of this paper

Date Written: July/August 2019

Abstract

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: corporate social responsibility (CSR), employee treatment, human capital, patents and citations, technological innovation

JEL Classification: G3, J24, M14, O31

Suggested Citation

Mao, Connie X. and Weathers, Jamie, Employee Treatment and Firm Innovation (July/August 2019). Journal of Business Finance & Accounting, Vol. 46, Issue 7-8, pp. 977-1002, 2019, Available at SSRN: https://ssrn.com/abstract=3604481 or http://dx.doi.org/10.1111/jbfa.12393

Connie X. Mao (Contact Author)

Temple University - Fox School of Business and Management ( email )

416 Alter Hall
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Jamie Weathers

Western Michigan University - Finance & Commercial Law ( email )

Kalamazoo, MI 49008
United States

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