Corporate Employee-Engagement and Merger Outcomes

Hao Liang is Assistant Professor of Finance at Singapore Management University, and Luc Renneboog is Professor of Corporate Finance at Tilburg University. This post is based on a recent paper by Professor Liang, Professor Renneboog, and Cara Vansteenkiste.

Corporations represent a nexus of implicit and explicit contracts between shareholders and stakeholders. An important stakeholder group that is crucial to firms’ operations and performance consists of the employees, representing a firm’s human capital. Employees are involved in the firm’s daily operations, have a contractual claim on the company in the form of salaries, and can directly and indirectly influence corporate decision making and governance. However, the extant literature offers mixed evidence on the direction and mechanisms through which firms’ employee-engagement—policies and practices that aim to provide better welfare (e.g., higher compensation and job security, more training and career advancement, the improvement of workforce health and safety, enhancement of workforce diversity) for employees—affects firm value. Some find a negative relation between shareholder value and labor orientation, explaining this relation by (too strong a) legal protection of workers (e.g. Dessaint, Golubov, and Volpin, 2016) and manager-employee alliances (Pagano and Volpin, 2005). Human relations theories take a positive view on labor, arguing that labor is a key organizational asset and that stronger employee incentives increase productivity, such that a firm’s orientation towards labor can create substantial value for shareholders (Edmans, 2011).

In this paper, we revisit this important issue, aiming to reconcile the conflicting findings in the extant literature. We take a third (and probably a more equilibrated and mixed) view, which hinges on the inalienability of human capital and employment policies. Inalienability stands for the fact that, in important contracting and transactional situations such as an acquisition, a buyer of a firm cannot change the human capital employed at a target company without frictions nor can it change the contracts that a target firm has voluntarily—in the sense of going beyond incumbent regulation—adopted. Furthermore, the target’s employees may also be less receptive to the labor policies implemented by the acquiring firm and whereas both human capital and explicit contracts are inalienable, it may also be difficult and even counter-productive if the acquirer were to break implicit contracts between the target’s employees and their management. Consequently, a transfer of the acquirer’s employment policy to the target may not be straightforward nor, even if this were possible, would it be expected to have the same impact as in the acquirer.

We argue that the benefits and costs of corporate employee-engagement depend on the extent to which the roles of employees are transferable across firms. We organize our analysis around mergers and acquisitions (M&As), which provide an ideal setting to study the inalienability of human capital and the transferability of a firm’s employment policies to another firm. The global scope of the M&A market enables us to compare the role of a firm’s employee-engagement in driving shareholder value in a domestic setting and in a contractually and operationally more complex cross-border setting. This way, we can shed some light on how the contracting and operating environment interacts with the inalienability of human capital and employment policies in affecting employee-shareholder relations and ultimately firm value. A firm’s engagement in, for example, employment and wage insurance may function as an incentive tool to increase labor productivity and firm value when there are few uncertainties concerning the firm’s contracting environment. However, such engagement could potentially also turn into a burden for the firm by exposing the firm to greater uncertainties with regard to the implementation of its employment policies, thus reducing firm value.

Analyzing a sample of 2,009 acquiring firms from 48 countries engaging in 4,565 M&A deals, we find that there is considerable cross-firm and cross-country variation in firm-level employee-engagement that is priced by the market around corporate takeover events. The effects of employee engagement—especially those related to compensation and job security, but not those about training, diversity, and health and safety—on acquirers’ announcement returns are significantly positive for firms conducting domestic deals, but they are significantly attenuated in cross-border deals. This finding holds even after controlling for differences in country-level labor regulations and other macroeconomic factors. The attenuating effect of acquiring a foreign target does not stem from the fact that cross-border deals on average destroy value as these deals have higher announcement returns than domestic acquisitions, but rather appears to be specific to a firm’s relation with its employees (the inalienability of human capital and employment policies, as we argue).

We investigate several mechanisms related to employee incentives and inalienability of employment policies that may account for the difference in the effect of employee-engagement on shareholder returns around domestic and cross-border M&A deals. In particular, we find that stronger “motivational factors” such as more pecuniary incentives and better monetary compensation are associated with higher acquirer announcement returns in domestic deals but lower returns in cross-border deals. This is not the case for “job security factors” such as employment retention and trade union relations. In addition, the negative employee-return relation in cross-border deals is stronger when uncertainty with regard to post-merger labor integration is higher and when economic nationalism in the target country is stronger. We also find that most effects of employee-engagement come from acquirers rather than targets. We rule out several alternative explanations based on country-level labor regulations, cultures, common language, degree of economic development, and the potential backfiring effect of over-engaging in employees. Overall, our results suggest that part of the value composition in M&As comes from increasing productivity that is not purely operational but partially stems from a firm’s human capital, although the increase can be offset by the inherent inalienability of human capital and employment policies in cross-border acquisitions.

The full paper is available for download here.


Dessaint, O., A. Golubov, and P. F. Volpin. 2016. Employment Protection and Takeovers. Journal of Financial Economics, forthcoming.

Edmans, A. 2011. Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices. Journal of Financial Economics 101 (3), 621-640.

Pagano, M. and P. F. Volpin. 2005. Managers, Workers, and Corporate Control. Journal of Finance 60, 841–868.

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