Happy employees help to make stock prices more accurate

Companies with high levels of employee satisfaction are associated with stock prices that more accurately reflect the value of the company, according to new research by Durham University Business School. This is due to increased positive employee reviews on the company giving more insight to investors on how the firm is performing, compared to firms with unsatisfied employees who are not likely to leave a review at all.

The increase in information about the company through these reviews, informs investors further than if no reviews were left at all, leading to a revision in firms’ stock prices. based on their reviews.

The study also found that the greater the focus on human capital of the company, the stronger the effect employee reviews have on stock prices.

Conducted by Dr Anthony Kyiu (lead author), Assistant Professor of Finance at Durham University Business School and co-authors, Evans Boamah (University of Warwick) and Bernard Tawiah (University of the West of England), the research investigated the relationship between employee reviews and stock price informativeness. To do so, Dr Kyiu reviewed data on almost 300,000 employee reviews from Glassdoor.com for companies in the S&P 500 index during the period 2008 to 2021.

Dr Kyiu then analysed financial and stock price data on these firms, and measured stock price informativeness by identifying firm stock return variation that was unexplained by other market factors. The findings suggest that the more positive the employee reviews, the better the stock price informativeness, making the corporate information much more transparent to investors.

This implies that when employees rate their firms more favourably, it signals higher levels of employee satisfaction and a favourable perception of the firm’s overall performance and work environment. As a result, investors and other market participants are likely to perceive employee ratings as favourable signals of the firm’s prospects, thereby potentially increasing the level of stock price informativeness.

“Investors have typically evaluated a company’s prospects by looking at its financial factors and industry news, However, there is a growing understanding that non-financial data, such as employee reviews, can provide insightful information about a company’s internal operations and future performance.” says Dr Kyiu,

“Employees possess private information that is typically unavailable to external parties or may not be reflected in traditional reports and financial statements – therefore giving greater insight to potential investors, thus making stock prices more responsive to corporate information.”

The results clearly show that non-financial data can give investors greater insights into firm performance, and help improve a firm’s information environment thereby enhancing stock price informativeness.

Dr Kyiu states that these findings prompt investors to further review information that is not financially-focused as it can give greater, more transparent insights into a firm’s performance, helping them to make better informed investment decisions.

Featured Photo by Jason Goodman on Unsplash.

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