Employee welfare and firm financial performance revisited

Abstract

Purpose This study aims to revisit the link between employee welfare and firm financial performance using a large sample. Besides, the study explores mechanisms behind the link and heterogeneous effects of employee welfare on firm performance across firms and industries with different characteristics. These findings help partly explain mixed results in previous works.

Design/methodology/approach This study utilized KLD database data from 2001 to 2015 to capture the firm-level employee welfare, then analyze the link between employee welfare and firm financial performance. The findings are further verified using clustered standard errors ordinary least squares (OLS) regression analysis along with robustness testing, which supports the validity of our conclusions.

Findings The research result confirms a positive association between employee-friendly practices and firm performance indicated by Tobin's q. Regarding the mechanisms linking the two, the study shows that higher employee welfare is positively associated with firm productivity and innovation investment, while it is negatively related to the cost of finance. Further, consistent with agency and modern management theories, the effect of employee welfare on financial performance is more pronounced for human-intensive (i.e. R&D-based) firms and firms with better corporate governance.

Originality/value This study contributes to the existing literature on the association between employee welfare and firm performance in several ways. First, using the index of employee welfare from KLD can alleviate inherent limitations in previous studies. Second, the authors provide and validate the possible mechanisms linking employee welfare and firm value. Third, the authors also extend the literature by providing new insights into the employee welfare–firm performance nexus through a contingency perspective.