Employee treatment and firm innovation

We identify firm innovation as a channel through which the treatment of employees affects firm value. Long‐term incentive theory supports positive effects of ‘good’ employee treatment on innovation. Alternatively, entrenchment theory suggests such treatment will lead to complacency and shirking, hen...

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Bibliographic Details
Published in:Journal of business finance & accounting 2019-07, Vol.46 (7-8), p.977-1002
Main Authors: Mao, Connie X., Weathers, Jamie
Format: Article
Language:English
Subjects:
corporate social responsibility (CSR)
employee treatment
Employees
Human capital
Human resource management
Innovations
J24
M14
O31
patents and citations
technological innovation
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Summary:We identify firm innovation as a channel through which the treatment of employees affects firm value. Long‐term incentive theory supports positive effects of ‘good’ employee treatment on innovation. Alternatively, entrenchment theory suggests such treatment will lead to complacency and shirking, hence deterring innovation. These opposing views merit investigation since human capital is increasingly essential to the growth and success of a firm. Using the KLD database and patent/citation data, we find a significant positive relationship between favorable employee treatment and the innovation quantity and quality of a firm. Furthermore, we find that the positive treatment of employees improves innovation focus – more innovation related to firms’ core business, leading to greater firm value via the increased economic value of patents. These findings, robust to endogeneity concerns, provide support for the long‐term incentive hypothesis, suggesting that well‐treated employees increase firm innovation. Thus, firm innovation represents a channel through which positive employee treatment enhances firm value.
ISSN:0306-686X
1468-5957
DOI:10.1111/jbfa.12393