Employees’ online reviews and equity prices
Introduction
We investigate the relationship between employee satisfaction and long-run equity returns using an extensive dataset of employees’ online reviews for US public firms posted on Glassdoor over the period from 2009 to 2016. We find a statistically significant positive association between average employee satisfaction rating and corporate performance (ROA and Tobin’s q). This is robust to controlling for firm characteristics, review volume, industry and time fixed-effects. Then, we assess the performance of portfolios that include the stocks of the best firms in our sample in terms of employee satisfaction rating. Over the eight-year period under scrutiny, a value-weighted portfolio earned on average a monthly four-factor alpha of 1.35%. Higher abnormal returns are obtained in the case of an equally-weighted portfolio, when using instead of Carhart’s four-factor model either Fama–French’s three-factor model or the CAPM, and when review volume is taken under consideration when constructing the portfolios.
These findings allow us to make three main contributions to the literature on employee satisfaction, human capital and intangibles in general. First, our analysis suggests that firms rated highly by their current employees in terms of satisfaction achieve superior financial performance relative to firms characterised by low levels of employee satisfaction. Thus, we provide further evidence in support of those advocating a human capital-centred view of the firm (e.g., Zingales, 2000), according to which employees should not be considered expendable commodities, as is the case in the traditional view, but rather key organisational assets who can contribute significantly to firm value through innovation and customer relationships. Second, the obtained association between employee satisfaction and corporate performance implies that employees’ online reviews are good predictors of a firm’s financial results and, consequently, of value-relevance for investors. Hence, we provide additional empirical support to those arguing that due to the failure of standard accounting measures to capture investments in intangibles, non-financial indicators, such as employee satisfaction, are of key importance for security valuation (e.g., Amir and Lev, 1996). Third, the portfolio analysis indicates that employee satisfaction is not fully valued by investors in the equity markets as a trading strategy based on investing in firms characterised by high levels of employee satisfaction achieves statistically and economically significant abnormal returns. Therefore, we provide further evidence that intangibles are not fully priced in the stock market and, most importantly, that this is not due to lack of information (e.g., Edmans, 2011), since we measure employee satisfaction on the basis of freely available online reviews.
Employee satisfaction and its value-relevance for both existing and potential shareholders is an issue that has attracted considerable attention in the literature (e.g., Edmans (2011), Filbeck and Preece (2003)). Relevant empirical research is commonly based on Fortune’s ‘100 Best Companies to Work for in America’ list, compiled annually following the results of an employee survey for US firms with more than 1,000 employees that have been certified for a fee by the Great Place to Work® Institute. We differentiate from these studies and extend the literature by performing our analysis on the basis of employees’ online reviews. This allows us to overcome a number of inherent limitations that Fortune’s list has. For example, results based on that list may be driven by self-selection bias, since only firms that have (or believe to have) high levels of employee satisfaction have an incentive to pay a fee, get certified and participate in the survey. Moreover, as the Fortune’s list includes the top 100 firms and is published every January, an analysis can be performed for a limited firm sample and only at an annual frequency. Finally, we should note that employees’ online reviews have also been used for examining the relationship between employee satisfaction and corporate performance in Huang et al. (2015). In contrast to our study, however, the authors focus on family firms, do not perform a portfolio analysis or account for review volume.
Section snippets
Data
We obtain from Glassdoor all available employee reviews for US public firms over the period from 2009 to 2016. Our focus is on the overall satisfaction rating reported on a 5-point Likert scale, and only on reviews posted from current employees so that the results are not driven by disgruntled former employees. For robustness, we also disregard firms with less than 500 reviews during the period under scrutiny. Our final online review sample consists of 326,037 employee ratings for 313 firms.
Conclusion
We use employees’ online reviews to examine the relationship between employee satisfaction and long-run equity returns. Consistent with human capital-centred theories of the firm, we find a statistically significant positive association between employee satisfaction and corporate performance. This intangible is not fully valued in the stock market, however, as a trading strategy based on investing in firms with high levels of employee satisfaction achieves statistically and economically
Acknowledgement
We would like to thank Glassdoor, Inc. for providing us with the employees online reviews dataset. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.
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