Is What's Best for Employees Best for Shareholders?

38 Pages Posted: 7 Mar 2006

See all articles by Olubunmi Faleye

Olubunmi Faleye

Northeastern University - Finance Group

Emery A. Trahan

Northeastern University, Finance Group

Date Written: May 2006

Abstract

We study the effect of labor-friendly corporate practices on shareholder outcomes using firms selected by Fortune magazine as the "Best 100 Companies to Work for in America" over 1998-2004. We find that investors react positively to the list's announcement and that list firms subsequently outperform a size- and industry-matched control group on productivity, profitability, and value creation. Human capital dependent firms are more likely to make the list and the benefits of improved performance accrue mostly to such firms. Our analysis of excess executive compensation and forced turnover suggests that top management derives no pecuniary benefits from labor-friendly practices. We therefore interpret our results as consistent with rational choice, noting that the benefits of devoting significant resources to employee welfare appear to outweigh the costs, especially for firms that depend more on human capital.

Keywords: Employee welfare, social responsibility, firm value

JEL Classification: G34, M14

Suggested Citation

Faleye, Olubunmi and Trahan, Emery A., Is What's Best for Employees Best for Shareholders? (May 2006). Available at SSRN: https://ssrn.com/abstract=888180 or http://dx.doi.org/10.2139/ssrn.888180

Olubunmi Faleye (Contact Author)

Northeastern University - Finance Group ( email )

Boston, MA 02115
United States

Emery A. Trahan

Northeastern University, Finance Group ( email )

Boston, MA 02115
United States

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