The value of employee satisfaction in disastrons tines evidence ftom covid 19

Supporting such human capital or employee morale channel, we find the employee satisfaction effect to be stronger in firms with more intangible assets and in knowledge-based industries..

The Value of Employee Satisfaction in Disastrous Times: Evidence from COVID-19 *

Chenyu Shan

Shanghai University of Finance and Economics

Email: shan.chenyu@mail.sufe.edu.cn

Dragon Yongjun Tang

The University of Hong Kong

Keywords: Employee satisfaction, Shareholder value, Intangible assets, COVID-19

JEL classification: G32, G34

* We thank Rui Albuquerque, Alex Edmans, Hao Liang, Jun-Koo Kang, Alan Kwan, Gustavo Manso, Henri Servaes, Fei Xie, Quan Wen, Chendi Zhang, Jian Zhang, and Joe Zou for helpful comments We thank MioTech for providing some of the data Tang acknowledges the support of the General Research Fund (#17510016) of Hong Kong Research Grants Council Shan acknowledges the support of the Research Fund for Youth (# 71803122) of the National Natural Science Foundation of China

The Value of Employee Satisfaction in Disastrous Times: Evidence from COVID-19

Abstract

Employee treatment is a dilemma for many business owners and executives: while everyone prefers a pleasant working environment, satisfying employee needs can be costly to shareholders Given such costs, is it still worthwhile to make employees happy on a daily basis? This study provides evidence supporting a positive answer: firms with more satisfactory employees heading into the COVID-19 withstand the crisis better according to stock price reaction Such outperformance by high-employee-satisfaction firms is more pronounced for financially weaker firms, for knowledge-based industries, and for FinTech-developed cities Moreover, the result is not driven by state ownership, information asymmetry, or insider propping Our findings show the importance of employee morale during crisis period and that firms can do well by doing good

Keywords: Employee satisfaction, Shareholder value, Intangible assets, COVID-19

JEL classification: G32, G34

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1 Introduction

Is it worthwhile for a firm to treat its employees well on a daily basis? The answer is not obvious because it is costly to improve employee treatment In absence of regulation and government intervention, firms usually underinvest in employee welfare as labor cost reduces corporate profitability in a way similar to financing cost Indeed, there is large-sample evidence

showing that businesses are more likely to fail when they provide safer workplace.1 Some believe that relentless firms with merely acceptable working conditions produce more profits for their shareholders However, there are also potential benefits associated with better employee treatment such as talent recruiting and retention as well as enhanced productivity In this paper, we examine stock price performance during COVID-19 to draw new inference on this issue This setting is interesting as many firms are at the edge of survival and employees are experiencing unprecedented challenges as well

Employers may expect reciprocity when they treat employees well That is, firms hope that more satisfactory employees will work harder to increase firm value, especially when the firms are facing severe difficulties However, if employees feel they are already contributing

to a good social cause, they may engage more in unethical behavior including shirking and cheating at work, due to the so-called “moral licensing” (List and Momeni, 2020) COVID-19 forced many people to work from home, making shirking a real concern It is not obvious what types of firms would perform better during such a crisis Employees from firms with hostile working environment are probably used to coordination troubles They may even get a productivity boost when they do not need to go to office, which helps them avoid counterproductive office politics In contrast, firms with good employee morale may become

1 See Pagell et al (2020), which is based on 386,179 organizations in Oregon, USA from 1989 to 2014 They find that the odds and length of survival are smaller for firms providing a safe workplace

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less productive under “social distancing” as bonding and collegiality play an important role for their work COVID-19 provides a rare opportunity to examine the value of employee satisfaction and generate implications on corporate employment policies

The COVID-19 setting also helps circumvent endogeneity concerns as firm-employee relation is slow-moving and correlated with other firm attributes in normal times The big, direct, and exogenous shock brought by COVID-19 hence is useful for the empirical identification In this study, we use novel data to analyze the short-run reaction of stock prices

to the outbreak of COVID-19 to quantify the value of employee satisfaction from a shareholder’s point of view Our employee satisfaction data come from MioTech, a leading FinTech company based in Hong Kong that specializes in environmental, social and governance (ESG) information for Chinese firms, covering all publicly listed Chinese companies (and many private companies).2 MioTech uses natural language processing to crowdsource employee satisfaction data from current and former rank-and-file employees.3

We examine stock price reactions to COVID-19 for all firms listed in the two stock exchanges in mainland China (‘A-shares’ in Shanghai and Shenzhen) We focus on February

3, 2020, the first trading day after the lockdown of Wuhan—the Chinese city where the first infected case was identified and the largest number of infected patients resided.4 We find that while Chinese stocks experienced record drops on that day, firms with higher employee satisfaction scores withstood the negative shock better than firms with lower employee satisfaction scores The economic magnitude of the result is meaningful: the high-low return

2 MioTech is financed by Horizons Ventures, the private investment fund of Li Ka-shing (the richest man in Hong Kong) See media reports:

https://www.scmp.com/tech/enterprises/article/2115417/li-ka-shing-shows-strong-backing-hong-kongs-fintech-sector-leading

https://www.fintechfutures.com/2020/01/hong-kongs-sustainable-finance-start-up-miotech-closes-series-a-funding/

https://finance.yahoo.com/news/horizons-ventures-continues-lead-series-100000493.html

3 The raw data is similar to the employer reviews on Glassdoor

4 Figure 1 shows the timeline for the outbreak of COVID-19

in by financial market investors when the coronavirus hit

The stock price reaction suggests that firms that have regularly treated their employees well can weather negative economic shock better High morale is important for working from home arrangements or no pay leaves, which are meant to ease the financial burden on firms In contrast, firms that have treated their workers poorly in the past experience reciprocity from their workers at this disastrous time It is worth noting that even though corporate culture is known before COVID-19, its value is not revealed until difficult times when people pay more attention to such nuisances and when individuals are personally experiencing the impacts This point of investor awareness during crisis is also made by Servaes and Tamayo (2013) Supporting such human capital or employee morale channel, we find the employee satisfaction effect to be stronger in firms with more intangible assets and in knowledge-based industries

Why does employee satisfaction make firms more resilient to an exogenous shock? We consider how firms are prepared for working from home arrangements Employees who feel satisfied with their firms may be more incentivized to work remotely Accordingly, the employee satisfaction effect should be more pronounced for firms whose employees are better able to work from home It is challenging to directly measure the productivity of working from

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home Thus, we exploit how differential technology development that facilitates workers’ remote work ability affects our results Using proprietary data from Ant Financial (the FinTech company affiliated with Alibaba), we find that, for firms located in areas with more usage of mobile payments, employee satisfaction has a stronger mitigating effect on price drop during the shock This finding corroborates the channel that employee satisfaction plays a role via employees’ maintaining productivity while working from home

We also consider alternative explanations for the better stock price reaction of higher employee satisfaction firms such as government or societal support Firms that have treated their employees better in the past may derive economic benefits in crisis period due to “halo effects” Governments may bail out or provide guarantees to large corporations with political implications, such as state-owned enterprises Government support can also add value to the connected firms (Fisman, 2001), but through a channel different from employee morale However, we find a similar significant employee satisfaction effect for both state-owned and privately owned firms, suggesting that employee satisfaction effect is beyond the government support channel The second alternative explanation is that employees may have better information about the firm than outsiders The observed relation between stock returns and employee satisfaction could be due to information revelation of updated information about the firm disclosed by its employees However, we find similar results when we use the employee satisfaction score from former employees who may have left the firm several years ago The third alternative explanation hinges on inside ownership Insiders have incentives to support their share prices, reducing downward pressure on the stock during the selloff of COVID-19

We examine this possibility by adding inside ownership measure into our analysis, and find that the effect of employee satisfaction remains statistically significant and economically

as “best places to work” have better future stock returns However, there are also opposing views in the literature Mueller, Ouimet, and Simintzi (2017) show that firms with higher pay inequity (lower pay for rank-and-file employees relative to top executives) have higher valuation and better operating performance This finding suggests that firms are better off if they treat their non-executive employees less generously Our study complements this line of literature by focusing on an adverse shock to rank-and-file employees and their firms Our broad-based analysis from a major emerging market is complementary to existing studies using alternative employee data from the U.S (e.g., Green, Huang, Wen and Zhou, 2019).5 Our findings support the view that firms can do well by doing good

It is important to note that, according to Edmans (2011), the market does not fully recognize the value of employee satisfaction in a timely manner The value of employee satisfaction is incorporated into stock prices over the long run Our findings shed light on why employee satisfaction is not priced in the stock market in a timely fashion: the value of rank-and-file employees could be hard to identify and thus ignored by the public in tranquil times However, when the tangible link between the firm and its employees is damaged by a crisis like COVID-19, the value of employee satisfaction as an important intangible link could be

5 The interpretation of our results is different from Green, Huang, Wen, and Zhou (2019), which emphasizes the information content of employer reviews We find that scores given by current employees and past employees have similar effect on the firm’s stock price during the crisis, suggesting that what the employee satisfaction score reveals is related to firm background such as corporate culture

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realized and attracts investors’ attention Therefore, this study complements Edmans (2011) from two aspects First, we focus on stock performance during disastrous times Our findings explain why it takes long for investors to incorporate employee satisfaction into price We document that the effect may not be revealed in tranquil times but becomes materialized after negative shocks Second, we use employee review data from China, a considerably different labor market from the U.S Given that employee satisfaction is part of ESG, our findings are consistent with several other contemporaneous studies including Ding et al (2020) and Albuquerque et al (2020) that firms with better ESG perform better during COVID-19

The reminder of the paper is organized as follows Section 2 introduces the background

on COVID-19 and the related literature Section 3 describes the dataset for our empirical analysis Section 4 presents our main results and Section 5 concludes

2 Background on COVID-19 and Related Literature

COVID-19 posed major disruptions to economic activities all over the world The coronavirus was first manifested by a cluster of pneumonia cases of unknown type in Wuhan, the capital of Hubei Province in China in December 2019 Although Chinese government officially acknowledged the infectious nature of the novel coronavirus on January 20, its severity was not immediately recognized In late evening of January 23, the city of Wuhan was declared to be in lockdown and restricted movement (effective 10am on January 24), but by January 29 the novel coronavirus had spread to all provinces in China On January 31, WHO declared the outbreak a “public health emergency of international concern”.6

The outbreak of COVID-19 was sudden, unexpected and dramatic The market closed from January 24 for the Chinese New Year holidays and the scheduled closure of the market

6 https://www.bbc.com/news/world-51318246

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was extended from January 31 to February 2 due to the coronavirus outbreak The market reopened on February 3 with a record loss and finished the day with 7.7% drop for the Shanghai Composite Index 3,527 (out of 3,859) stocks in the A share market saw price declines on that day and 3,177 stocks hit the trading halt limit after losing 10% Therefore, we choose February

3, 2020 as the event day for our study

The impact of COVID-19 goes far beyond infected people.7 Healthy people have been severely inconvenienced by the lockdown, curfew and other anti-epidemic measures The economic impacts of the outbreak, although difficult to estimate thus far, have been deep and wide.8 It presents a sudden challenge to firm-employee relations and provokes investors’ perceptions about employee satisfaction, which may not be revealed in more tranquil times While the economy was essentially frozen and many firms had zero revenues, firms were asked

by the government to continue to pay their workers The large and sudden disruption caused

by COVID-19 has thus far caused many firms, especially SMEs which did not have sufficient cash before the outbreak, to come under liquidity pressure Some firms had to cut wages and benefits while asking employees to contribute to avoid bankruptcy In this context, employee-firm relations become crucial to a firm’s stability Firms that have healthy relations with their employees may receive more support from them, while firms with weak relations with employees may find it hard to motivate its employees to work from home Hence, we expect that firms with different levels of employee satisfaction before the outbreak will vary in their stock market performance during the outbreak

7 The two major national political meetings, usually in March, were cancelled The China International Conference in Finance (CICF), the major finance academic event, scheduled for July 2020 was also cancelled

8 It is estimated that around 5 million people in China lost their jobs amid the outbreak of the new coronavirus in January and February 2020 (https://www.cnbc.com/2020/03/16/china-economy-millions-lose-their-jobs-as- unemployment-spikes.html).

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Unlike financial crises, the COVID-19 outbreak is exogenous to the practices of financial institutions and to the economic links between firms, making it even harder to predict the impacts from an economist’s perspective This study therefore reflects on the value of employee satisfaction when firms experience real disruptions, instead of a decline in trust and social capital within the financial sector used by corporate social responsibility (CSR) literature (Lins, Servaes, and Tamayo, 2017) Our setting is also different from the firm-specific shocks analyzed by Hong, Kubik, Liskovich, and Scheinman (2019), or industry-specific shocks used

by Kim, Maug, and Schneider (2018) Evidence on how firms with different levels of ESG perform during crisis period is mixed On one hand, Lins, Servaes, and Tamayo (2017) find that high-CSR firms performed better during the 2008 financial crisis, as stakeholders were more willing to help high social capital firms weather a negative shock.9 On the other hand, Bansal, Wu, and Yaron (2019) argue that firms without negative ESG incidents (“good” stocks) generate lower abnormal returns than firms with incidents (“bad” stocks) during economic downturns Their explanation is that ESG is a luxury goods and investors pull back their concerns for socially responsible investment when they face more wealth constraints

A growing literature demonstrates employee morale is an important intangible to firms, while its value is slowly incorporated into prices.10 Higher employee satisfaction leads to higher stock returns in the long run (Edmans, 2011) Better employees’ views on managerial integrity and ethics lead to higher firm valuation (Guiso, Sapienza, and Zingales, 2015) Employee-friendly policies are positively related to acquirer returns in domestic M&As (Liang,

9 More generally, one strand of literature posits that firms can do well by doing good, i.e., investing in corporate social responsibility (CSR) or environmental, social, and governance (ESG) has a positive impact on firm performance and shareholder value (Flammer, 2015; Krüger, 2015; Albuquerque, Koskinen, and Zhang, 2018), mitigates agency issues (Ferrell, Liang, and Renneboog, 2016), and enhances acquirers’ stock returns (Deng, Kang, and Low, 2013)

10 A burgeoning literature is on how firms treat their employees to improve overall firm value, see, among others, Guan and Tang (2018)

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Renneboog, and Vansteenkiste, 2020) Employee flexibility helps firms respond to exogenous shocks and enhances firm value (Au, Dong, and Tremlay, 2019) In tranquil times, the importance of employee morale may not be fully realized by the market However, the benefits

of employee satisfaction derived from healthy firm-employee relation may become materialized when the firm is hit by a shock, during which formal contractual agreements could

be broken by bankruptcies, and non-contractual factors such as employee morale will have an impact

Our study may add to the understanding of employee value for emerging markets Many studies exclude China, which has a huge labor market with unique characteristics Using a cross-country sample, Edmans, Li, and Zhang (2020) document that employee satisfaction improves recruitment, retention and motivation in flexible labor markets, where firms face fewer constraints on hiring and firing In rigid labor markets, legislation already provides minimum standards for worker welfare and thus, additional expenditure may exhibit diminishing returns The effect of employee satisfaction is insignificant for some major Asian countries, such as Korea and India, and developing economies such as Brazil

Empirical evidence on the effect of employee satisfaction on shareholder value is still scarce, especially during disastrous time Contemporaneous studies discuss ESG or firm culture in general, but not employee treatment specifically Albuquerque, Koskinen, Yang, and Zhang (2020) and Ding, Levine, Lin, and Xie (2020) find that firms with better ESG ratings have higher stock returns during COVID-19 Li, Liu, Mai, and Zhang (2020) document that firms with a strong culture have better operating performance per employee in 2020Q1.11 To

11 Other studies on the financial impact of COVID-19 may have a different focus For example, Halling, Yu, and Zechner (2020) discuss corporate bond and equity issuance at the outbreak of COVID-19

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our knowledge, we are among the first to study this issue in the setting of COVID-19, a wide real disruption to firm-employee relation for a universe of firms

market-3 Data and Sample

Our employee satisfaction data are from MioTech, a leading FinTech company based in Hong Kong with specialization in environmental, social and governance (ESG) information MioTech compiles ESG data for Chinese firms, covering all publicly listed companies and many private companies It uses natural language processing and crowdsourcing to construct employee satisfaction data from various sources It aggregates all online comments posted by

a firm’s employees Both employees’ textual comments about the firm and employee satisfaction scores are available to us The raw content of data is similar to Glassdoor The employee satisfaction data is directly from employees, instead of survey responses from an intermediary Moreover, we have many firms with different levels of employee satisfaction, instead of solely those “best companies.” It is important to note that unlike the institution-driven U.S market, the Chinese stock market has a predominance of individual traders Such retail trading may be more prone to inattention as investors may not notice the value of employee satisfaction until the outbreak of a crisis like the coronavirus

The employee satisfaction database covers 1,343 firms that are publicly listed in the Chinese stock exchanges (the ‘A share’ market) For each firm, the database contains satisfaction scores from one or more employees that are working or ever worked for the firm The data contains both scores from individual employees as well as the average score in the past We have also cross-checked the wording in comments made by each individual employee,

in addition to the satisfaction score Overall, an employee gives her company a higher score

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when her written comments about the firm are more positive We merge the employee satisfaction scores in this database with the employer firm’s financial information and stock return data from CSMAR

Our sample spans all 32 provinces in mainland China and 74 (out of 82) industries based

on CSRC industry classification The score ranges from 1 to 5, with mean 3.16, median 3.14, and standard deviation 0.98 The past 3-year employee satisfaction score is of similar range and is less volatile across firms, with mean 3.25, median 3.3, and standard deviation 0.59 The most represented industries are computer and telecommunication device manufacturing, IT and pharmaceuticals Summary statistics in Table 1 show that the average total book assets of our sample firms is CNY 23.4 billion 31.3% of our sample firms are state-owned firms, according

to the ultimate controller information provided in CSMAR The mean leverage, investment (measured by Capital Expenditure/Total Assets) and Net Cash Flow (measured by Net Cash Flow/Total Assets) are 0.435, 0.045, and 0.013, comparable to those of the whole sample of firms listed in mainland China (Allen, Qian, Shan, and Zhu, 2020)

4 Results

4.1 Employee Satisfaction and Stock Price Reaction to COVID-19

Before we estimate a multi-variate model to quantify the marginal effects of employee satisfaction on the stock returns, we first conduct a univariate analysis Firms are divided into low- and high-employee satisfaction groups and we calculate value-weight average returns for each group on the event date (February 3, 2020), using market capitalization as the weight As shown in Figure 2, Panel A, the raw return for the low satisfaction-group is -8.39%, while the raw return for the high satisfaction-group is -7.88%, or 0.51% higher than the low-group The difference between the two groups widens if we examine the industry-adjusted return, which

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is calculated as the raw return subtracting the value-weight industry portfolio return, based on the broad CSRC industry classification (identified by the initial-letter of the industry code) Panel B shows that, the mean industry-adjusted returns for the low- and high-groups are -0.52% and +0.23%, respectively, and the difference is statistically significant at the 1% level Another alternative return measure we consider is the return adjusted by the Fama-French five-factor model including market, size, book-to-market, momentum, and profitability (Fama and French, 2015; Liu, Stambaugh, and Yuan, 2019), we find that the difference between low- and high-employee satisfaction groups continues to be large and significant (Panel C) This suggests that firms with high employee satisfaction experience a smaller stock price drop on February 3 than firms with low employee satisfaction, and the difference goes beyond pricing determinants at the industry level

We estimate regression models of stock returns on February 3, 2020 as a function of the pre-COVID-19 employee satisfaction score and a number of control variables Table 2 contains our baseline regression models The dependent variable is industry-adjusted returns on February 3 We include industry fixed effects in all specifications in case the dependent variable does not tease out all industry-related factors Column 1 shows that firms with a higher employee satisfaction score estimated in 2019 are associated with higher industry-adjusted returns on February 3 The economic impact of the employee satisfaction score is large: a one-point increase in employee satisfaction will increase a firm’s industry-adjusted return by 0.217 percentage points (or around 30% relative to the sample mean)

One concern with the specification reported in Column 1 is that the stronger performance

of high-employee satisfaction firms could be due to omitted variables that happen to be correlated with employee satisfaction, rather than the employee satisfaction itself We admit that identifying all these omitted variables is difficult We include as many possible variables

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as possible that can correlate with employee satisfaction as controls, and re-estimate the specification We control for firm characteristics that may be important for stock returns, and proxies for a firm’s financial strengths that may prepare the firm during a market collapse We follow Lins, Servaes, and Tamayo (2017) to construct controls, including firm size, book-to-market ratio, return in 2019, beta (estimated using monthly stock returns over the past 60 months), and idiosyncratic risk (the residual variance from the market model estimated over the five-year period ending in December 2019) We also control for cash holding, leverage, profitability, investment and cash flows of the firm, and the Fama-French five-factor loadings Another concern is that the observed strong performance of high employee satisfaction firms could be due to investors’ anticipation of government implicit guarantees provided to state-owned firms to prevent their stock price collapse To mitigate this concern, we add one additional control for state-owned firms

In Column 2, we include all firm characteristic controls and pricing factor loadings in the

specification The coefficient of Employee Satisfaction remains positive and significant

State-owned firms, as expected, experienced less price decline on the event day, as evidenced by the positive and significant coefficient of the state-owned dummy

In Column 3, we replace the employee satisfaction measure extracted in 2019 with the

Past 3-year Employee Satisfaction as an alternative measure The Past 3-year Employee

Satisfaction is a score averaged across all employees that submitted their scores during 2016

to 2018 The coefficient of this measure is 0.282, significant at the 5% level The result suggests that not only does the recent score predict returns, but the past 3-year score also contains information that is not incorporated in stock prices This finding implies that employee satisfaction score contains information that is related to firm culture, which is slow-moving and likely to be under-valued by investors In this regard, our finding is slightly different from

Does the result represent a general impact on firms in mainland China, or is it only limited

to those with direct linkage to the coronavirus, i.e., people in the area where the coronavirus is most severe? To answer this question, we explore the possibility that the magnitude of the effect could vary with firm location The COVID-19 was reported to outbreak in Wuhan, which has the largest number of infected people and suffered most from the coronavirus We separately examine firms that are headquartered in and outside Wuhan, and find that the role

of employee satisfaction in resisting market shock is not differentiated between Wuhan and other cities Specifically, in Column 2, we exclude firms headquartered in Wuhan from the

sample The coefficient of Employee Satisfaction High is similar to that in Column 1, and statistically significant at the 1% level In Column 3, we exclude firms located in Hubei

province (of which Wuhan is its capital city) The coefficient of Employee Satisfaction High

remains positive and significant The result suggests that the increased stock return attributed

to employee satisfaction on February 3, 2020 is not unique to Wuhan or Hubei, i.e., the most affected area, but represents a general pattern for other areas, too

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4.2 The Effect of Financial Constraints

The effect of employee satisfaction on shareholder value should depend on the firm’s financial conditions A strong financial position and high financial flexibility of a firm better prepared the firm for disaster risks (Ramelli and Wagner, 2020; Fahlenbrach, Rageth, and Stulz, 2020) For firms that are financially sound prior to the outbreak of COVID-19, any adverse effect of COVID-19 via the firm-employee link on stock prices could be smaller, as cash flows generated by the firm prior to the shock will be sufficient to sustain the shock Such firms would be less affected even if its operation is suspended However, for firms with weak financials, whether it can continue operation during the crisis will be crucial to its performance, and its ability to continue good performance would largely depend on employee morale and employees’ incentives to work Thus, we expect a stronger employee satisfaction effect on firm value for firms subject to financial constraints

We consider three types of financial constraint measures One is asset size We split the sample into large- and small-size groups based on the median book assets of the sample Smaller firms are perceived to have less financial flexibility and are more constrained heading into the crisis Consistent with our expectation, we find significant employee satisfaction effect for the small firm group: firms with high employee satisfaction experienced less stock price drop than their counterparts with low employee satisfaction by 0.541 percentage points, with

t-statistics 2.735, while this difference is insignificant for the large-firm group (coefficient of Employee Satisfaction High is 0.205; t-statistics is 1.354)

The second measure is the earnings measure return-on-assets Splitting the sample into high- and low-earnings group based on the 50th percentile points in ROA, we find significant employee satisfaction effect for the low-ROA group, while the effect is weak for the high-ROA group Testing the difference in the coefficient for low- and high-groups, we find the difference

is statistically strong at the 5% level

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The third measure is the cash conversion cycle (CCC) It measures how fast a company can convert cash on hand into more cash on hand Specifically, it is calculated as days inventory outstanding (DIO) + days sales outstanding (DSO) - days payables outstanding (DPO) It measures the length of a cycle in which the firm first converts its cash into inventory and accounts payable, through sales and accounts receivable, and then back into cash Usually the shorter the cycle is, the better is the firm

A larger CCC indicates that it takes longer for a firm to convert its investment in inventory and other resources into cash flows Thus, firms that have a longer CCC would be under greater cash pressure when its operation is suspended due to the outbreak of COVID-19 For such firms, employee morale is crucial for maintaining the firm’s operation We test this hypothesis

by separately examining firms with long- and short-CCC The evidence shown in Table 4, Column 5 suggests that employee satisfaction only has significant impact for firms with longer CCC

Taken together, the results in Table 4 suggest that employee satisfaction is more valuable

at crisis for firms with more financial constraints This finding highlights the value of human capital as intangibles During a crisis like COVID-19, any tangible link between firm and its employees, and link between employees, are severely damaged Hence, the intangible link based on employee morale becomes important In the next sub-section, we analyze and quantify the value of human capital

4.3 The Value of Human Capital

4.3.1 Intangibles and Knowledge-based Industries

If the relation between employee satisfaction score and stock returns reflects employee productivity, we would expect a stronger relation for firms in which human capital plays a particularly important role Therefore, we further our discussion on the potential impact of

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human capital Human capital is expected to be more valuable for firms which have more intangibles in their assets It is also expected to be stronger in knowledge-based modern industries, such as the pharmaceutical and software sectors, where the employee-firm relationship is particularly important (Edmans, 2011) We design tests to examine whether the role of employee satisfaction is indeed differentiated for such firms

In our first set of tests, we split the sample by whether the ratio of a firm’s intangible assets

to total assets is above the sample median In Panel A of Table 5, Columns 1 and 2 show that, the incremental effect of employee satisfaction on stock returns is significant for firms with

high intangible assets, and insignificant for firms with low intangible assets We use Intangible

to denote industries that have more intangibles out of total assets Column 3 further quantifies the differential effect of employee satisfaction for low- and high-intangible firms The positive

and significant coefficient on the interaction term of Employee Satisfaction High and Intangible

suggests that employee satisfaction has a larger impact on stock returns during the outbreak of COVID-19 for firms with a higher proportion of intangible assets For high-intangible firms, the incremental impact of high employee satisfaction on stock return at the outbreak is 0.549 percentage point larger than for low-intangible firms

In the second set of tests, we split the sample by whether a firm is in a knowledge-based industry We define pharmaceutical, IT and network service, and R&D service as knowledge-based industries, which cover 536 firms in total in our sample As Panel B, Column 1 shows, for firms in the knowledge-based industries, a one point increase in the employee satisfaction score is associated with a 0.995 percentage point increase in the firm’s industry-adjusted returns, while this increase is merely 0.191 percentage points for firms in non-knowledge-based

industries In Column 3, we use a dummy indicator Knowledge-based to differentiate these firms in our sample Interacting with Employee Satisfaction High dummy, we find that the

outperformance of high-employee satisfaction firms is 0.991 percentage point more for firms

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in knowledge-based industries than for firms in other industries The coefficient of the

standalone variable Employee Satisfaction High remains positive and significant, indicating that firms from industries other than knowledge-based also benefit from better firm-employee relations, although the economic magnitude is smaller

One conjecture is that firms that are in knowledge-based industries also have lower leverage, which makes them better able to withstand negative shocks We find that indeed, there is a negative correlation between a firm’s being in knowledge-based industries and the firm’s financial leverage The correlation is estimated to be -0.18, significant at the 1% level Meanwhile, splitting sample firms into high- and low-leverage groups, we find stronger employee satisfaction effect for the low-leverage group, suggesting that low leverage amplifies the positive role of employee morale in affecting shareholder value

4.3.2 FinTech Development and Employees’ Ability to Work from Home

Why does employee satisfaction benefit firms during disastrous time? In this subsection

we examine possible mechanisms that may be at work Due to city lockdown and quarantine,

countless firms have to suspend work or ask their employees to work from home, which requires more loyalty and self-discipline on employees Employees who are more satisfied with

their firm in the past should be more incentivized to work hard during the special period

The pre-requisite for the first ‘work-from-home’ channel, is employees’ ability to work remotely Although employees value work-from-home in normal times, in reality, the fact is that working from home is still relatively uncommon (Mas and Pallais, 2017).12 Firms and their employees vary in their ability to ensure work-from-home productivity Employee satisfaction is expected to have a more pronounced effect when employees are better able to

12 A more recent study by Dingel and Neiman (2020) estimate that around 37% of the jobs in U.S can be entirely done at home These jobs typically pay more than jobs that cannot be done at home

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do remote work, which is challenging to measure empirically Such ability depends both the development of IT technology in the local community and employees’ individual work-from-home skills, including time-consciousness, communication and organization skills, which is even more difficult to measure Thus, we collect data and construct measures for IT development in local community which is relevant for the availability of software and hardware needed for work-from-home

We consider the mobile payment rate, which is obtained from the research department of Ant Financial, the highest valued FinTech company in the world, with a valuation of $150 billion It operates Alipay, the world’s largest mobile and online payments platform.13 The mobile payment rate is a city-level ratio of the number of people who use mobile payment out

of total population of the city,14 thus, it measures the deepness of FinTech application in a city The deepness of mobile payment usage relies on technology development including Big Data and risk management Firms located in a city with more developed mobile payment should be better able to utilize the necessary technology and facilities they need to work from home Besides, usage of mobile payments largely facilitates daily life, strengthening the positive effect of employee satisfaction on productivity

We split firms into high- and low-groups based on whether the firm is located in a city with its mobile payment usage rate above the sample median As Table 6, Panel A, Columns 1 and 2 show, the positive impact of employee satisfaction on stock returns is only significant for firms located in a high mobile payment usage city The outperformance is as large as 0.84 percentage points and statistically significant at the 1% level For firms located in cities with its mobile payment rate below the sample median, employee satisfaction does not have a

13 world-2014-2

https://www.businessinsider.com/alipay-overtakes-paypal-as-the-largest-mobile-payments-platform-in-the-14 Due to data security reasons, this percentage number is standardized with a certain city as the benchmark Therefore, this number does not have any economic meaning However, the standardization process does not change the rank of cities in terms of the usage rate of mobile payment