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

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

Chenyu Shan
Shanghai University of Finance and Economics
Email:
Dragon Yongjun Tang
The University of Hong Kong
Email:

July 10, 2020
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

*

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.

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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

Electronic copy available at: />

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:
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4

The raw data is similar to the employer reviews on Glassdoor.
Figure 1 shows the timeline for the outbreak of COVID-19.
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difference was 0.5 percentage points while the Shanghai Composite Index dropped 7.7
percentage points on that day. This result is robust to alternative measures and sample selection.
The employee satisfaction effect remains strong even when we exclude firms located in
the city of Wuhan from the sample. This finding highlights the pervasive impact of COVID19 on the financial market and the profound moderating effect of employee satisfaction. Our
finding suggests that the effect of the observed rank-and-file employee satisfaction on stock
returns is not limited to directly infected areas. Instead, healthy people who continue to work
for their employers drive the differences in firm performance, and such a difference is priced
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

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important. The finding suggests that the incremental effect of employee satisfaction on
shareholder value is on top of the effect of inside ownership.
Our study adds to the growing literature showing strategic firm considerations with

respect to their employees (see, e.g., Ellul and Pagano, 2019) and the value of employee
satisfaction to the firm (see, e.g., Edmans, 2011). Edmans (2011) finds that companies named
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 rankand-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

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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, employeefirm 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 ( />7

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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,

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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

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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 marketwide real disruption to firm-employee relation for a universe of firms.

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 institutiondriven 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 highemployee 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 onepoint 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-tomarket 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 stateowned 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. Stateowned 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

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Green, Huang, Wen, and Zhou (2019), who find that employee reviews submitted in earlier
time are less informative for stock prices.
To facilitate the interpretation of the results, we replace the continuous employee
satisfaction score with a dummy indicator that denotes whether a firm has its satisfaction score
above the sample median, and then re-estimate the model. We report the estimation results in
Table 3. Column 1 shows that the marginal difference in industry-adjusted stock returns on
February 3 between high- and low-employee satisfaction firms is 0.408 percentage points, or
54.3% relative to sample mean. In this column, we include the full set of firms listed in the
mainland China stock market, and add a dummy for firms that missing employee satisfaction
score in the specification.
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 SatisfactionHigh 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 SatisfactionHigh
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 SatisfactionHigh 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 SatisfactionHigh 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 knowledgebased 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 SatisfactionHigh 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 SatisfactionHigh 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-fromhome 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

/>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.
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material impact on the firm’s stock return on February 3 (Column 2). The marginal difference
between high- and low-employee satisfaction groups is 0.315 and statistically insignificant.
An alternative measure we use to measure employees’ work-from-home ability is the
development of on-line sales. We obtained the on-line sales revenue per capita at the provincial
level from National Bureau of Statistics of China. Similar to mobile payment, on-line sales also
rely on and reflect the technology development, which can also affect local employees’ workfrom-home ability. One big impact of COVID-19 and city lockdown is that sales people cannot
visit their clients in person. Such negative impact could be mitigated if the firm uses more online sales platform. Therefore, we expect that the effect of employee satisfaction on stock
returns should be more pronounced for firms located in an area with more matured on-line
sales.
We split the sample into firms into high- and low-online sales groups based on whether
the firm is located in a province where the on-line sales revenue per capita is above/below the
sample median. As Panel B of Table 6 shows, for firms located in high on-line sales province,
high employee satisfaction firms outperform their counterparts with low employee satisfaction
by 0.749 percentage points, and this difference is statistically significant at the 1% level. While

for firms located in provinces with low on-line sales per capita, employee satisfaction does not
have a significant impact on stock returns (Column 2).
Overall, our findings show that the employee satisfaction effect is stronger for cities in
which mobile payment and on-line sales are more developed. This evidence is consistent with
the interpretation that the relation between employee satisfaction and stock returns is primarily
driven by employee morale, which is an important motivating factor in fostering employees’
work-from-home ability. As a result, such employee morale ultimately determines employees’
productivity during COVID-19.

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4.4 Alternative Explanations
4.4.1. State-owned Firms and Government Support
The outperformance of firms with high employee satisfaction may be due to the implicit
guarantee provided by the government to state-owned firms. In China, state-owned firms
receive an implicit guarantee from the central government (Lin and Tan, 1999) and have lower
investment efficiency (Allen, Qian, Shan, and Zhu, 2020). Perceiving the possibility that stateowned firms will receive government support and avoid default, investors may price in the
guarantee effect and react less negatively to state-owned firms on the outbreak day.
To alleviate this concern, we identify state-owned firms in our sample and compare the
effects of employee satisfaction on stock returns for state-owned firms and non-state-owned
firms. Table 7 shows that, within the state-owned group, firms with high employee satisfaction
experience a 0.572 percentage point higher stock return on the COVID-19 outbreak day than
firms with low satisfaction. Within the non-state-owned group, this difference is 0.304
percentage points. Column 3 shows that difference in the two coefficients is statistically
insignificant (the interaction term has a coefficient estimate of 0.281 with t-statistics 1.077).
Overall, the results suggest that employee satisfaction outperformance is of similar economic
magnitude for both state-owned and non-state-owned firms. Our results show that stock returns
on the COVID-19 outbreak day are not explained away by the possibility of an implicit

guarantee to state-owned firms.
4.4.2 Information Revealing from Employee Satisfaction Scores
We interpret our results as a manifestation of the value of rank-and-file employees as
intangible assets. The value is not incorporated into market price timely in tranquil period but
is priced in at the crisis. Another possibility is the information channel: the observed positive
effect of employee satisfaction scores on stock returns is because the employee reviews contain
useful information about the firm, which has not been reflected in the price. This channel
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predicts that scores given by the firm’s current and former employees should be different.
Scores given by current employees should contain updated information about the firm and thus
has a stronger impact on the stock price. While scores given by former employees, i.e.,
employees who have left the firm at the time they submitted their score, should have weak or
no effect on stock returns on the event day.
We reconstruct the employee satisfaction measure by distinguishing current employees
from past employees. Taking average of scores given by employees within the two groups, we
obtain an average employee satisfaction score given by present employees and an average score
by former employees. High Employee SatisfactionPresent is a dummy indicator taking one if the
average score given by present employees is above the median of the sample that comprises
scores given by present employees only. High Employee SatisfactionFormer is a dummy indicator
taking one if the average score given by past employees is above the median of the sample that
comprises scores given by past employees only.
Table 8 presents the estimation results. The coefficients of High Employee
SatisfactionPresent and High Employee SatisfactionFormer are both positive and significant,
suggesting that satisfaction scores given by both current and past employees are informative
about stock prices. The difference of the effects of present/past employee satisfaction scores is
also immaterial. The result is inconsistent with the interpretation that the relation between
employee satisfaction and stock returns is explained by employees’ reviews revealing

nonpublic information.

4.4.3 Inside Ownership
Another possible explanation for the positive relation between employee satisfaction and
stock return in disastrous time is that firms with high employee satisfaction happen to be the

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ones with higher inside ownership. Insiders may have faith in the firm and thus trade less during
the disastrous time. Therefore, the firm faces less downward pressure on its stock price.
We collect inside ownership information from CSMAR. Inside ownership is defined as
the ownership by members of the board of directors, board of supervisors and other executives
of the firm. We divide the number of shares held by the insiders by the total number of shares
of the firm, and use the percentage as the measure for inside ownership.
In the first test, we include inside ownership as a control in addition to a set of controls
we used in the baseline regressions. Table 9, Column 1 reports the estimation results. The
coefficient of Employee SatisfactionHigh remains positive and significant, suggesting that
inclusion of inside ownership as control does not undermine the outperformance of highsatisfaction firms. The coefficient of Inside Ownership is insignificant, which indicates that
management team’s ownership does not affect the firm’s performance.
Inside ownership is found to have both benefits and costs for corporate governance
(Rosenstein and Wyatt, 1997). On one hand, management’ holding of shares can serve as
incentives for executives to work hard and help align interest between managers and
shareholders; on the other hand, high inside ownership also represents more management
freedom from market discipline, which allows exploitative behavior of the manager and hurts
outside shareholders. If the observed employee satisfaction effect is explained by inside
ownership, then we may expect stronger employee satisfaction effect when inside ownership
is larger. To examine this, we split the sample into high- and low-inside ownership group based
on the sample median, and conduct the analysis. Different from the prediction, we find stronger

employee satisfaction effect for firms with low inside ownership (Table 9, Column 3). The
effect of employee satisfaction for firms with high inside ownership is statistically insignificant
(Table 9, Column 2). The difference in the effect of employee satisfaction for low- and high-

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