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

Author

Listed:
  • Alex Edmans

    (London Business School, London NW1 4SA, United Kingdom; Centre for Economic Policy and Research, London EC1V 0DX, United Kingdom; European Corporate Governance Institute, 1000 Brussels, Belgium)

  • Darcy Pu

    (London Business School, London NW1 4SA, United Kingdom)

  • Chendi Zhang

    (University of Exeter Business School, Exeter EX4 4PU, United Kingdom)

  • Lucius Li

    (Shanghai BOLI Education Technology Ltd., Shanghai 201313, China)

Abstract

Studying 30 countries, we find that the link between employee satisfaction and stock returns is significantly increasing in a country’s labor market flexibility. This result is consistent with employee satisfaction having greater recruitment, retention, and motivation benefits where firms face fewer hiring and firing constraints and employees have greater ability to respond to satisfaction. Labor market flexibility also increases the link between employee satisfaction and current valuation ratios, future profitability, and future earnings surprises, inconsistent with omitted risk factors and identifying channels through which employee satisfaction may affect stock returns. 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.

Suggested Citation

  • Alex Edmans & Darcy Pu & Chendi Zhang & Lucius Li, 2024. "Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World," Management Science, INFORMS, vol. 70(7), pages 4357-4380, July.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:7:p:4357-4380
    DOI: 10.1287/mnsc.2023.4889
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J53 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Labor-Management Relations; Industrial Jurisprudence
    • J81 - Labor and Demographic Economics - - Labor Standards - - - Working Conditions
    • J83 - Labor and Demographic Economics - - Labor Standards - - - Workers' Rights
    • J88 - Labor and Demographic Economics - - Labor Standards - - - Public Policy
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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