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China Study: Employee Satisfaction Drives Stock Performance in Hard Times and Good

Happy employeesA study to be published in the academic journal Review of Finance finds a direct link between employee satisfaction in publicly held companies in China and their share price performance on the stock market.

The Cost of Employee Engagement Pays Off in Share Price Returns
Findings Suggest More Than a Temporary Effect

Research support for the impact of employee satisfaction and financial returns comes from China in a recently published study by Chenyu Shan and Dragon Yongjun Tang, “The Value of Employee Satisfaction in Disastrous Times: Evidence from COVID-19”, March 30, 2022.” 

The authors write, “Using unique data for Chinese publicly listed firms, we show that having satisfied employees is valuable to the firm. Specifically, firms with higher employee satisfaction scores withstand COVID-19 better in terms of stock market performance. Such an effect is more pronounced for firms with more intangible assets and in knowledge-based industries. Moreover, higher employee satisfaction scores predict better operating performance. While not fully revealed in tranquil times, the effect of employee satisfaction is materialized when the firms experience negative shocks, such as COVID-19. Our findings suggest that firms can do well in crisis periods by doing good in normal times.”

The Cost of Employee Engagement Pays Off in Share Price Returns

They observe that “employee treatment is an important but challenging element of corporate environmental, social, and governance (ESG) policies. Satisfying employee needs can increase corporate productivity but is also costly to shareholders.”

They continue, "The findings suggest that the effect of the observed rank-and-file employee satisfaction on stock returns is not limited to directly infected areas. Instead, healthy people who continue to work for their employers drive the stock price reaction to the pandemic shock. We extend the event window to five, 10, 20, and 60 trading days (around three calendar months) after the initial reaction on Feb. 3, 2001 and find that the outperformance of high employee satisfaction stocks remains significant during those extended periods. We proceed to examine whether the employee satisfaction effect is temporary or persistent during the sample period. We sort stocks based on the previous year’s employee satisfaction scores into high- and low-satisfaction portfolios. Controlling for the Fama-French five factors, we find significant and positive excess returns of the high portfolios. The results are robust to alternative weighting schemes and benchmarks.”

Findings Suggest More Than a Temporary Effect

The authors say these findings “suggest that employee satisfaction goes beyond a temporary effect, and has a long-term effect on stock market performance.  The stock price reaction suggests that firms which have regularly treated their employees well can weather negative economic shocks better. High morale is important for working-from-home arrangements or no-pay leaves, which are meant to ease the financial burden on firms. In contrast, firms that have treated their workers poorly in the past may not have the necessary support from their workers during this disastrous time.”

The authors signal the impact of corporate culture. “It is worth noting that, even though corporate culture is known before COVID-19, its value is not revealed until difficult times, when people pay more attention to such nuisances and when individuals are personally experiencing the negative impacts. This point of investor awareness during crisis is also made by Servaes and Tamayo (2013). Supporting such human capital or employee morale channels, we find the employee satisfaction effect to be stronger in firms with more intangible assets and in knowledge-based industries.”

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