(The) impact of employee satisfaction on stock returns in Korea

Abstract

This research investigates the additional alpha derived from a value-weighted portfolio based on the KEJI Employee Satisfaction Index from 2005 to 2021. The findings reveal that the alpha, excluding the risk-free rate, is 0.98% monthly in a three-factor model, 0.92% in a four-factor model, and 0.74% in a five-factor model. These results remain significant regardless of the weighting methodology applied and even after outlier removal. The additional alpha does not originate from an initial undervaluation and subsequent recovery of the firms' value. This is confirmed through an analysis of earnings surprises. The implications are twofold: first, it affirms the importance of intangible assets like employee satisfaction in augmenting shareholder value. Second, it indicates the market's inefficiency in fully valuing employee satisfaction, suggesting potential investment opportunities in firms that prioritize employee contentment.