Employee satisfaction, firm performance, and stock returns: Evidence from the Korean stock market

 

Meaning & Research Context

Employee satisfaction refers to how content employees are with their jobs, including pay, management, work–life balance, opportunities, and culture. Firm performance includes productivity, profitability, growth, and other operational measures. Stock returns indicate how equity investments in the market appreciate or depreciate over time.

This research investigates the link between employee satisfaction and a firm’s financial success on the Korean stock market, measuring satisfaction using employee review scores from a major online job platform and observing how these scores relate to firm financial metrics and future stock returns. ScienceDirect

1. Introduction

With the increasing importance of human capital in modern firms, understanding how workforce sentiment influences business outcomes has become crucial. Past studies (e.g., Edmans, 2011) showed that higher employee satisfaction in U.S. firms was linked to stronger stock performance, partly because markets underestimate the value of human capital initially. This Korean study extends that idea to a non-U.S. context, using detailed satisfaction scores rather than simple rankings. ScienceDirect

The paper asks:

• Does employee satisfaction affect firm performance?

• Does it predict future stock returns?

• Do investors fully incorporate these effects into stock prices? econpapers.repec.org

2. Advantages (Key Findings & Contributions)

a) Strong empirical evidence

• Firms with higher employee satisfaction generate higher average stock returns than those with lower satisfaction. These return differences remain even after adjusting for common risk factors, suggesting satisfaction itself holds predictive power. ScienceDirect

b) Performance mechanisms explained

Employee satisfaction positively influences:

• Labor productivity (sales per employee),

• Employee retention (lower turnover),

• Labor investment efficiency (better allocation of human capital).
  These channels together enhance firm performance and future profitability. ScienceDirect

c) Granular measurement

Unlike previous research that only used “best-company” lists, this study uses continuous review scores and subcategories (e.g., management, work–life balance, promotion opportunities), offering deeper insights into which aspects of satisfaction matter most. ScienceDirect

d) Insight into market mispricing

Investors don’t fully price in the benefits of satisfaction. Firms with high satisfaction show larger forecast errors for future earnings and sales, indicating market under-estimation of human capital value. ScienceDirect

e) Relevance to ESG

The study contributes to environmental, social, and governance (ESG) research by showing that social aspects (employee satisfaction) relate to financial performance and should be considered in investment strategies. ScienceDirect

3. Disadvantages & Limitations

a) Data limitations

Access to detailed review data might vary across firms; smaller firms often have fewer reviews, which could bias satisfaction measures. ScienceDirect

b) Causality challenges

Although a positive association is strong, causal inference remains tough. Higher satisfaction might be both cause and effect of better performance — firms doing well financially may treat employees better. ScienceDirect

c) Market specificity

The findings reflect the Korean market and cultural context. Results might differ in countries with different labor laws, corporate governance norms, and investor behavior.

d) Forecast limitations

While forecast errors reveal under-pricing, the paper doesn’t fully model why investors systematically ignore satisfaction signals — a deeper behavioral finance explanation would help.

4. Challenges in the Research

a) Measuring satisfaction accurately

Employee reviews are subjective and could be influenced by short-term events (e.g., layoffs, compensation changes). Ensuring consistency and comparability across firms is a challenge. ScienceDirect

b) Risk factor control

Stock return studies must control for many risks (size, value, momentum). Showing that satisfaction adds information beyond traditional factors requires rigorous testing and robustness checks. ScienceDirect

c) Endogeneity concerns

Employee satisfaction and firm performance might be simultaneously determined. Sophisticated econometric methods are needed to isolate true impacts.

5. In-Depth Analysis

a) Employee satisfaction & performance

Empirical tests reveal that satisfaction is linked to productivity and retention. Firms with higher scores tend to operate more efficiently and keep talent longer — both drivers of long-term success. ScienceDirect

b) Predictive power for stocks

The paper constructs portfolios sorted by satisfaction scores and finds that high-satisfaction portfolios outperform low-satisfaction ones by significant margins monthly. This relation persists after controlling for standard risk exposures. ScienceDirect

c) Subcategory effects

Management quality scores were most predictive of future returns, suggesting that leadership and internal practices matter deeply. Other important domains include promotion prospects and work–life balance. ScienceDirect

d) Labor intensity interaction

The satisfaction–returns effect is especially strong for labor-intensive firms, where human capital plays a greater role in generating value. ScienceDirect

6. Conclusion

This research confirms that employee satisfaction matters not only for internal performance but also for financial market outcomes. Firms with satisfied workers:

• Show higher productivity, retention, and labor investment efficiency,

• Achieve better future profitability,

• Earn higher stock returns,

• And are initially under-priced by the market due to investor under-appreciation of human capital benefits. ScienceDirect

These findings align with stakeholder theory, which emphasizes that success stems from valuing all stakeholders — including employees — and that doing so can enhance long-term value creation. ScienceDirect

7. Summary

Aspect	Key Point
Research Goal	Link employee satisfaction, performance, and stock returns in Korea
Method	Employee review scores + financial & stock return data
Main Result	Higher satisfaction → better performance & higher returns
Mechanisms	Productivity, retention, and labor efficiency
Investor Insight	Markets undervalue satisfaction effects
Implication	Human capital matters for investors and managers