Value of Employee Satisfaction During the Financial Crisis
Cathy Xuying Cao, Chongyang Chen, (2016) "Value of employee satisfaction during the financial crisis", Managerial Finance, Vol. 42 Iss: 12, pp.1208 - 1225
Posted: 13 Jul 2016 Last revised: 21 Mar 2017
Date Written: July 12, 2016
This paper examines how employee satisfaction affects firm value around the financial crisis. We use the 2008 financial crisis as exogenous shocks to firms to mitigate endogenous concern that employee satisfaction and firm value can be jointly determined. We employ the difference-in-difference approach and find that firms with high employee satisfaction or the Best Companies experience larger decreases in firm value than comparable firms when the crisis happens. In addition, such decreases in firm value only exist among the Best Companies with high financial flexibility. We also show that only when interacted with high financial flexibility, employee satisfaction leads to high firm value during the crisis. Finally, we find that the Best Companies do not have any advantage in the recovery of firm value after the crisis, regardless of their level of financial flexibility. The paper contributes to the literature by not only documenting the time-varying effect of job satisfaction on firm value but also identifying a crucial factor that impacts the value-creation of employee satisfaction: financial flexibility. Our findings provide helpful implications to the business community. Our evidence suggest that to reap the benefits of employee satisfaction, companies need to manage their financial flexibility to buffer against potential negative shocks while having strong corporate governance mechanism to mitigate agency concerns. Moreover, our study provides an investment recommendation to Socially Responsible investment (SRI) and suggests that it is better off implementing dynamic SRI investment strategies according to economic condition.
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