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Could high employee satisfaction mean more positive earnings for companies?

Alex Edmans, an advisor at Research Affiliates and a professor at the London Business School, discussed his research that looks into the link between employee satisfaction and performance in a recent video conversation for Research Affiliates.

In 2011, Edmans published research on employee satisfaction and whether it matters in terms of corporate performance and stock market returns.

“Employees are a key asset, so there is a good reason for a link between them and a company’s future stock performance,” he said.

To measure employee satisfaction, Edmans used the list of the “100 Best Companies to Work For in America,” which has been available since 1984. The list includes quantitative factors, such as pay and benefits, as well as qualitative factors, such as trust and management, pride in job, and camaraderie with colleagues.

To measure financial performance, Edmans looked at future stock returns.

Through his analysis, what Edmans found was that a value-weighted portfolio of the “100 Best Companies to Work For in America” earned an annual four-factor alpha of 3.5% from 1984 to 2009, and performed 2.1% above industry benchmarks.

The Best Companies also exhibited significantly more positive earnings surprises and announcement returns.

These findings are consistent with human capital-centered theories of the firm in that employee satisfaction is positively correlated with shareholder returns.

In the video, Edmans further explained the magnitude of the abnormal returns for the best-to-work-for companies in his study.

“I compared the ‘100 Best Companies to Work For in America’ to other companies in the same industry or those with similar characteristics,” he said. “Depending on the benchmark, I found they outperformed by 2.3% to 3.8% per year over a 28-year period for a cumulative 89% to 184% outperformance.”

In terms of employee satisfaction, results are driven by two factors, Edman explained. “One, employee satisfaction is good for firm value; it does not represent managerial slack,” he said. “And two, employee satisfaction is not only good for firm value, but many investors do not recognize it’s good, and therefore it is the ideal criterion to invest on.”

Thus, according to Edmans, there may be value in translating the ideas found in his research into an investable strategy.

For instance, the Parnassus Endeavor Fund follows a strategy that aligns with his findings.

The Parnassus Endeavor Fund — which used to be called the Workplace Fund — is a fossil-fuel-free and positive workplace fund that invests in U.S. large-cap companies with long-term competitive advantages and relevancy, quality management teams and positive performance on ESG criteria.

“I believe since its inception in 2005 through 2017, it returned 12.5% per year, while the market returned 8.3%,” Edmans said.

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