Undervaluation of Employee Satisfaction

Abstract

Prior literature has shown that companies in Fortune’s list of 100 best companies (BCs) to work for in the United States earn positive abnormal returns in the period after the list is published. This article assesses to what extent the prior performance of stocks is related to this anomaly. The authors find that these abnormal returns are indeed confined to a subset of BCs that performed poorly over the previous two years. Specifically, during the 1998–2017 period, a value-weighted portfolio of loser BCs earns an annualized three-factor alpha of 12.65% in the subsequent year, while the same figure for other BCs is an insignificant 1.11%. They also find that hedge funds hold more underappreciated BCs in their portfolios in comparison to other BCs, but other institutional investors do not. These findings are consistent with the view that mispricing forms over time and support the hypothesis that undervaluing human capital plays a vital role in the BC anomaly.

TOPICS: Security analysis and valuation, ESG investing, performance measurement

Key Findings

• ▪ The positive abnormal returns of Fortune’s 100 best companies (BCs) to work for in the United States is confined to a subset of BCs that had comparatively poor stock returns (i.e., underappreciated BCs) over the previous two years.

• ▪ One hundred dollars invested in a value-weighted portfolio of underappreciated BCs would have grown to $3,411.96 from February 1998–March 2018. In comparison, it would have been worth $442.36 if it had been invested in a value-weighted portfolio of other BCs. For reference, $100 invested in the S&P 500 Index would have grown to $269.40 over the same period.

• ▪ Hedge fund ownership is higher for underappreciated BCs in comparison to other BCs. In contrast, other institutional investors hold fewer underappreciated BCs than other BCs.