The Best Companies to Work For are Also Good Investments

New research shows that Forbes' annual list of the best companies to work for are also some of the best stocks to own.

In theory, if markets are efficient and prices incorporate all available information, any potential benefits of employee satisfaction should lead to higher valuations and thus no abnormal future returns. However, if investor preferences for socially responsible companies that treat their employees well raise valuations, that would lead to short-term capital gains but lower future expected returns in equilibrium.

Does the theory align with the empirical evidence?

There is a growing body of research on the relationship between employee satisfaction and long-run stock returns. The research has been motivated by the fact that “employees are our greatest asset,” a phrase often heard from company executives, but due to accounting rules requiring that most expenditures related to employees be treated as costs and expensed as incurred, the value of employees is an intangible asset that does not appear on any balance sheet, creating the potential for it to be an undervalued asset. In addition, while corporate culture plays a major role in employee satisfaction – it’s widely recognized to be a key intangible asset – there has been little effort to formally measure it. That leaves the interesting question of whether employee satisfaction provides information on future returns.