Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World

Abstract

We study the relationship between employee satisfaction and stock returns across 30 countries. Employee satisfaction is associated with superior long-run returns in flexible labor markets, such as the US and UK, but not rigid labor markets, such as Germany. Similar results hold for current valuation ratios, future profitability, and future earnings surprises, inconsistent with an omitted risk explanation and identifying channels through which employee satisfaction may affect stock returns. These results are consistent with employee satisfaction improving recruitment, retention, and motivation in flexible labor markets, where firms face fewer constraints on hiring and firing and employees have greater ability to respond to higher satisfaction. The findings have implications for the differential profitability of socially responsible investing strategies around the world – in particular, the importance of considering institutional factors when forming such strategies.

Keywords: Employee Satisfaction, Labor Market Flexibility, Socially Responsible Investing, Corporate Social Responsibility

JEL Classification: G12, G23, G38, J53, J81, J83, J88, K31