The Value of Employee Satisfaction in Disastrous Times: Evidence from COVID-19
Chenyu Shan, Dragon Yongjun Tang
Review of Finance, Volume 27, Issue 3, May 2023, Pages 1027–1076, https://doi.org/10.1093/rof/rfac055
We examine stock price performance during the COVID-19 to understand the value of employee satisfaction. The impact of COVID-19 goes far beyond those who have been infected by it. It presents a sudden challenge to working conditions, and provokes investors’ perceptions about employee satisfaction which may not be revealed in more tranquil times. In this context, employee-firm relations become crucial to a firm’s stability. Firms that have healthy relations with their employees may receive more support from them, whereas firms with weak relations with their employees may find it hard to motivate them to work from home. Hence, we expect that firms with different levels of employee satisfaction before the outbreak will vary in their stock market performance during the event.
Prior studies on ESG of Chinese firms face two major data limitations: (i) based on small samples; (ii) Chinese firms are usually excluded from the sample. We construct an employee satisfaction dataset that covers more than 1,700 firms that are publicly listed in the Chinese stock exchanges (the “A share” market). Our employee satisfaction data comes from MioTech, a leading ESG data provider based in Shanghai and Hong Kong with a specialization in providing ESG information and service. MioTech compiles comprehensive ESG data for all publicly listed Chinese firms, including firms listed in mainland China, Hong Kong, Taiwan, and the US. It also covers suppliers, customers, subsidiaries, and other related companies. In total, it provides ESG data for approximately 800,000 private and publicly listed companies in Greater China. It has been shortlisted for the Responsible Investment Award by the United Nations Principles for Responsible Investment (PRI) in 2021. MioTech uses natural language processing and crowdsourcing to collect ESG data from various sources, including firms’ publicly disclosed reports, ESG-related news from government websites, and social media. We aggregate employee satisfaction ratings from individual employees and construct both current and past employee satisfaction scores at firm-level.
We find 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 during the COVID-19 shock. As shown by the following Figure 1, the high-employee satisfaction firms have a 1.26 percentage point-higher returns than low-satisfaction firms on the day of February 3, 2020, the first trading day after the official announcement of the outbreak of COVID-19. Such an effect is more pronounced for firms with more intangible assets and in knowledge-based industries. The effect is also stronger for employee satisfaction scores from present employees than from previous employees, supporting the interpretation that the scores contain useful information about the firm’s fundamental during the sample period of 2017 to 2020. Our results are robust to the control of firm characteristics, alternative measures of stock performance, and sample selection. The outperformance is not subsequently reversed and continues for multiple months following the outbreak of COVID-19. In addition to the short-term effect, we also document superior stock market performance of high satisfaction firms in the long term. Moreover, higher employee satisfaction scores predict better operating performance.
Figure 1. Stock Returns of High- and Low-Employee Satisfaction Firms
This figure plots the value-weight industry-adjusted return for high- and low-employee satisfaction firms, with market capitalization as the weight. Industry-adjusted return is calculated as the raw return subtracting the value-weighted industry average, based on the CSRC industry classification. We divide our sample firms into low-and high-groups based on the sample median of Employee Satisfaction, the firm-level employee satisfaction score in 2019.
Implication and Contribution
This study is among the first on the financial impact of COVID-19, as well as on the financial implications of corporate ESG for China. Our evidence from China adds to the burgeoning literature on ESG, which is largely based on the US and other developed economies. Our study demonstrates the value of treating employees well in normal times for shareholders – the employer receives reciprocity during disastrous times. Our findings suggest that firms can do well in crisis periods by doing good in normal times.