Satisfaction does equal higher returns

A fairly common statement heard these days in organisations is “high employee satisfaction translates to higher earnings”. Gautam Gosh pointed me to a recent paper by Alex Edmans, a Finance Professor at Wharton which compares;

stock returns of companies with high employee satisfaction and compares them to various benchmarks — the broader market, peer firms in the same industry, and companies with similar characteristics. His research indicates that firms cited as good places to work earn returns that are more than double those of the overall market.

What I found interesting is the investment market seems to ignore public available report, such as the Fortune “Best Places to Work” when there is statistical evidence of companies with higher employee satisfaction have higher returns, 14%. This just seems so obvious to me, or am I missing something?

The abstract is below:-

This paper analyzes the relationship between employee satisfaction and long-run stock performance. An annually rebalanced portfolio of Fortune magazine’s “Best Companies to Work For in America” earned 14% per year from 1998-2005, over double the market return. The portfolio also outperformed industry- and characteristics-matched benchmarks; controlling for risk, it yielded a four-factor alpha of 0.64%. These findings have three main implications. First, employee satisfaction may improve corporate performance rather than representing inefficiently excessive non-pecuniary compensation. Second, the stock market does not fully value intangibles, even when independently verified by a publicly available survey. This suggests that intangible investment generally may not be incorporated into short-term prices, providing support for managerial myopia theories. Third, socially responsible investing (“SRI”) screens need not reduce investment returns.

The paper is heavy reading but there is a good summary available on Knowledge @Whartons, How Investing in Intangibles — Like Employee Satisfaction — Translates into Financial Returns.

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