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Employee Treatment and Firm Innovation

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Abstract

We identify firm innovation as a new channel by which employee treatment affects firm value. Growth and innovation incentive theories support 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 in the “new economy,” human capital is increasingly essential to firm value and the growth and success of a firm has become more reliant on corporate innovation. Using the KLD Research & Analytics, Inc. SOCRATES database and newly acquired patent/citation data, we find an overall significant positive relationship between positive employee treatment and innovation input (R&D), quantity (Patents), and quality (Citations). Furthermore, we find that favorable employee treatment improves innovation focus – innovation projects more related to firms’ core business. These findings, robust to an alternate data source and endogeneity concerns, are consistent with the theories of growth and innovation incentive and suggest corporate innovation represents a channel by which employee treatment enhances firm value.

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... Along similar lines, we believe that employees play an important part in the process of innovation. Alongside our study, a few contemporaneous studies are also investigating the link between employee satisfaction and firm innovation (Chen, Chen, Hsu, & Podolski, 2016;Mao & Weathers, 2015;Mayer, Warr, & Zhao, 2015). Although related, our work is distinct from these studies as we provide a holistic picture which covers several different facets of employee satisfaction and helps managers channelize their efforts in the creation of a satisfied and productive workforce. ...
... Chen et al. (2016) primarily use a composite measure for employee treatment and find that firms which treat their employees well have better innovative success. Another related paper, Mao & Weathers (2015) centers on providing evidence on the relationship between employee treatment and success in innovation projects related to the core business of the firm. Mayer et al. (2015) combine treatment of employees and diversity culture of the company (treatment of women and minorities) and study its relationship with innovative efficiency. ...
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... Employee treatment is directly related to firm performance (Edmans, 2011;Faleye and Trahan, 2011), including capital structure decisions (Bae et al., 2011;Verwijmeren and Derwall, 2010) or acquisition performance (Ertugrul, 2013). Better working environments yield higher corporate innovation (Mao and Weathers, 2015;Adhikari et al., 2016;Chen et al., 2016) and innovation is also higher for a firm which promotes workplace diversity (Mayer et al., 2016;Gao and Zhang, 2016). ...
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... There is also evidence that employee treatment affects a firm's capital structure (Bae et al., 2011) and the level of corporate innovation (Chen et al., 2016;Mao and Weathers, 2015). A related literature documents a positive impact of employee stock ownership programs on productivity and innovation (Kim and Ouimet, 2014;Chang et al., 2015). ...
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