Since 2010 a widely accepted index of employee satisfaction has been available in China from CSR-analysis service provider Hexun.com.
Using this information Professor Xu Xixong (et al.) from the School of Economics and Business Administration at the Chongqing University set about finding out if there was a relationship between Chinese firm stock-price crash-risk and happy employees.
There is and, as we would hope, the relationship is negative i.e. happy employees equal less stock-price crashes; but why is this so?
There seem to be two reasons. First, the happier firms appear to have better internal control quality. Second, these firms benefit when bad news comes out from the enhanced reputation that happy employees seem to foster. Investors are more forgiving of good firms having a tough time and (my suggestion) may trust them more to fix their problems.
The effects are particularly noticeable in firms with high human capital intensity, those with weaker external monitoring (?!) and firms working in areas that face higher industry competition. This last point seems to be because good people with choices are attracted to happier workplaces.
For years my own analysis of corporate prospects has included an assessment of employee satisfaction and I’ve been surprised sell-side analysis hasn’t begun flagging this in recent years.
It’s a key variable in assessing a company’s long term prospects (and by implication its stock price) and work looked at today is just the latest addition to the sizeable body of academic literature that proves beyond doubt the connection.
You’ll find the paper in full via this link Nicer Firms – Less Risk
Happy Sunday.