TAILIEUCHUNG - Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices

A second advantage is that Treasury employees, who have access to the underlying Social Security numbers for the individuals in our data, can identify individuals’“birth” states, that is, the states in which individuals had resided when they applied for their respective Social Security numbers. 9 The final sample contains 753,521 observations, covering 85,888 distinct taxpayers. This overall sample can be divided into natives, nonnatives, and others. Na- tives are individuals: (i) who reside in the same Metropolitan Statistical Area (MSA) over the sample period, and (ii) whose current state of residence is their birth state. 10 Nonnatives are individuals whose current MSA does not overlap with their birth state (., a. | Does the Stock Market Fully Value Intangibles Employee Satisfaction and Equity Prices Alex Edmans 16-07 Does the Stock Market Fully Value Intangibles Employee Satisfaction and Equity Prices Alex Edmans MIT Sloan School of Management aedmans@. edu May 2007 Abstract This paper analyzes the relationship between employee satisfaction and long-run stock performance. A portfolio of stocks selected by Fortune magazine as the Best Companies to Work For in America in January 1998 earned average annual returns of 14 by the end of 2005 over double the market return and a monthly four-factor alpha of . The portfolio also outpeformed industry- and characteristics-matched benchmarks. These findings have two main implications. First they suggest that employee satisfaction improves corporate performance rather than representing inefficiently excessive non-pecuniary compensation. Second they imply that the stock market does not fully value intangibles even when they are made visible by a publicly available survey. This suggests that intangible investment generally may not be incorporated into short-term prices providing support for managerial myopia theories. KEywORDS Employee satisfaction market efficiency short-termism managerial myopia human capital JEL Classification G14 J28 M14 I am grateful to Henrik Cronqvist Xavier Gabaix David Hirshleifer Tim Johnson Lloyd Kurtz Stew Myers and seminar participants at MIT Sloan for valued input. I thank Amy Lyman of the Great Place To Work Institute for answering questions about the survey design.

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