Examining the impact of employee-friendly practices on performance volatility in African banks: A textual analysis approach

Abstract

This study examines the relationship between managerial attention to employee-friendly practices (EFPs) and performance volatility in banks. Using data from 30 public banks in four emerging African economies from 2005 to 2021, we utilize a text-based measure of managerial attention to EFPs based on keywords related to employee relations. We decompose performance volatility into inherent and residual components. The findings reveal a positive relationship between managerial attention to EFPs and inherent cashflow and earnings volatility. We also find a negative association of EFPs with residual cashflow volatility and positive association with earnings volatility. In cross-sectional analysis, we find that the positive link between managerial attention to EFPs and cashflow (earnings) volatility is more pronounced in large (small) banks, and in banks with lower levels of capital. Our results suggest that EFPs may encourage prudent liquidity risk management behavior, but greater uncertainty in equity capital levels, potentially weakening the overall soundness of banks.