Is There a Link Between Job Satisfaction and Firm Value?

What you see

In business circles the work of good, robust business research is not always appreciated to the extent it should. I am speaking as a business practitioner here.

Take, for example, Job Satisfaction and the link to Firm Value. The theoretical benefits of job satisfaction are quite clear.  There are plenty of references to build on. Job satisfaction influences recruiting and retaining key employees and that in turn has a link to firm value. Job satisfaction also influences worker motivation and organisational citizen behaviour.

Empirically demonstrating the link between job satisfaction and firm value is quite hard! We could prove the link between job satisfaction and job performance. And although there are older studies calling this link illusory and a fad recent meta-analysis studies clearly demonstrate this link. Besides the potential of reverse causality (does high job performance make you more satisfied?) there is, of course, the pesky issue that job performance is not firm performance and it is also not increased firm value.

So, it is unclear how everybody’s job performance adds up to a firm level performance. How would you take productivity, absenteeism, and turnover into account, for example? Also, the performance measures used do not take into account the extra costs for achieving higher job satisfaction. All these issues are at the centre of the job a business researcher is doing.

That is why this 2012 paper by Alex Edmans is so interesting. He developed a methodology taking care of the above mentioned reverse causality and he measured firm value rather than the more illusive firm performance. Do read this article if you are interested in how he tackled the issues. However, the outcomes of his research:

Job Satisfaction is positively linked to firm value (future stock returns)!

Since Corporate Social Responsibility has very similar issues (‘easy’ to link to firm value in theory, but much harder to demonstrate in practice), Edmans does the same with CSR.

Corporate Social Responsibility (measured as employee welfare, one of the key theoretical concepts of CSR) is found to improve stock returns, over a long time period and after controlling for risk.

Edmans concludes that a firm’s concern for other stakeholders may benefit shareholders, but these benefits are priced by the market only after four to five years because stakeholder capital is intangible. This seems to be a call to long, long term thinking.


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