How much do firms need to satisfy employees? - Evidence from credit spreads and online employee reviews

Summary

Focus

The relationship between employees and firms has been a major social and economic issue for more than a century, and it continues to attract increasing interest from the media, policymakers and researchers. Particularly owing to the rapid development of information technology, information transparency in the working environment has increased substantially. Using online employee reviews, we examine the effect of employee treatment on firms' credit spreads.

Contribution

Previous studies have proposed two seemingly conflicting views on this link. Some find that employee satisfaction seems to run high with wages and benefits: firms can raise workforce motivation, which is known as the fair wage-effort hypothesis. Others emphasise that high labour compensation can lead to high labour leverage and higher credit risk. Therefore, the relationship between employee benefits and firm performance remains controversial. To address this question, we examine the impact of employee satisfaction on credit spreads by focusing on which hypothesis – fair wage-effort or labour leverage – can more plausibly explain the relationship between credit risk and employee satisfaction.

Findings

We show that the sign of the effect of employee treatment on credit spreads depends on the sectoral intensity of human capital. In a sector with high intensity of human capital, especially the manufacturing sector, more generous benefits for workers lead to lower credit spreads. In contrast, in a sector with low intensity, they are associated with larger credit spreads. We also find evidence that the lowering effect on credit spreads in sectors with high human capital intensity is mainly due to increased labour productivity.

Abstract

Using employee reviews accumulated in online platform service and ESG scores, this paper studies the relationship between firms' workforce benefits and their credit risk. We provide evidence that the sign of the effect of employee treatment on credit spreads depends on the sectoral intensity of human capital. In a sector with high intensity of human capital, especially in the manufacturing sector, more generous benefits for workers lead to lower credit spreads. In contrast, in a sector with low intensity, they are associated with larger credit spreads. We also find evidence that the lowering effect on credit spreads in sectors with high human capital intensity is mainly due to increased labor productivity.

JEL classification:  G12, J28, J32

Keywords: employee satisfaction, online employee review, credit risk, labor risk