First, a relevant aside. If you were to pour water rapidly into a bath of sulfuric acid I can tell you what’d happen next. It’d also happen to someone else doing the same thing and at any time in the future (BTW, please, NEVER DO THIS!). Chemistry is therefore a science. Results of experiments can be replicated and don’t change, ever.
Finance and economics are different. Real time experiments are hard, results vary over time and are rarely capable of replication. For this reason to refer to these disciplines as sciences is a bit of a reach.
Finance in particular suffers from the problem that when an advantageous pattern is identified it often vanishes as people crowd in. So, it’s not possible to recreate finance experiments that have ‘proved’ a this-or-that from the past; because, often, the this-or-that doesn’t exist anymore.
So, what if you found a market advantage from the past that’s persistent? That’d be more like science and an extremely valuable observation to boot.
Hamid Boustanifar from the French business school EDHEC and Young Dae Kang from the Bank of Korea seem to have done just this and detail their findings in a paper in the most recent Financial Analysts’ Journal (there’s a free access version here Do Happy Workers Create Value?).
They start by going back to 2011 and a paper that showed then, companies with happy employees did better than peers. That paper was produced in the early days of the Socially Responsible Investing (SRI) trend and, as a result, widely cited by fans of what has since become ESG-investing.
The effect, being prominently flagged and the information widely disseminated should, according to accepted theory, have then gone away. Moreover, it’s possible the original research was just wrong and conflated happy-staff with some other key variable like investment and no such effect, in fact, exists.
So, Messieurs Boustanifar and Kang decided to see if, a) they could recreate the results but with a much bigger data-set and, b) eliminate potential coincident factors and prove the effect was ‘real’ after all.
The results of their work are, in the best of ways, shocking. Videlicet:
- The happy-staff effect has not only persisted but appears to be regularly worth between 200-270-basis points per annum.
- It appears not to be firm-size dependent. In fact portfolios of market-weight not equal-weight don’t exhibit the effect due to big firm drag.
- It’s not just a good-times effect. The companies with happy employees outperform peers especially well in tough times.
- The effect appeared constant [It should at least have tapered off over time] over the sample period which covered four decades.
- It appears to be a real effect i.e. there are no issues with coincident factors creating false positives. Original and add-on data confirmed this.
So what’s going on? How does something that’s observable, valuable and persistent not get invested away? The authors have a couple of suggestions.
First, it may be since happy-staff is a factor harder to quantify than, say, good balance sheet management it’s not addressed systematically. Second, SRI then, and ESG now tends to focuses on avoiding bad actors but pays less attention (so far!) to locating the good guys.
Whatever, the analysis provides useful AND valuable observation. The researchers caution however, persistence to date is no guarantee of persistence of the effect in future; that’s finance for you.
Adding water to sulfuric acid, even in 100-years, you’d still be advised to do very gently, and not at home; and that’s science for you.
Happy Sunday.