Employee Sexual Harassment Reviews and Firm Value

Abstract

Firms with workplace sexual harassment risk are reluctant to disclose such information. However, rank-and-file employees may reveal harassment information via anonymous job reviews. We investigate whether a measure of sexual harassment (SH score) constructed by performing textual analysis of online job reviews contains value-relevant information that affects firm performance. We find that SH reveals significant future problems for firms in terms of profitability, labor costs, and stock performance. In our sample firms during 2011-2017, high SH scores are associated with sharp declines in operating profitability and increases in labor costs. Firms in the top quantiles (top 1% to 5%) of the SH score earned lower risk-adjusted stock returns, representing an annual shareholder value loss of $0.8 to $1.4 billion per harassment-prone firm. These results indicate that sexual harassment has a highly detrimental effect on firm value, and employee voluntary reporting can be a valid disclosure mechanism when firms are disincentivized to reveal bad news. This research highlights the value-relevance of information held by rank-and-file employees, including information about possible corporate misconduct.