Return Cross-Predictability in Firms with Similar Employee Satisfaction

Abstract

This paper uses Glassdoor data and finds that the returns of similar employee satisfaction (SES) firms predict focal firm returns. A long-short portfolio sorted on the lagged returns of SES firms yields the Fama-French six-factor alpha of 135 bps per month. The observed predictability holds also in multivariate estimations, is distinct from industry and all existing inter-firm momentum effects, and cannot be explained by risk-based arguments or replicated with ESG scores or other firm characteristics. A new mechanism – common decision-making on employee welfare policies resulting from various information transfer channels – is the primary reason of return predictability in these firms.