Employee Quality and Firm Value: Evidence from Initial Public Offerings (IPOs)

• In Event: Doctoral Student Faculty Interchange I

Abstract

Prior research finds that the quality of a firm’s workforce is associated with improved financial reporting outcomes. If these improved outcomes allow managers to make better economic decisions and/or reduce firm risk, then employee quality should also be positively associated with firm value. We address this question through the setting of initial public offerings (IPOs), and offer three main findings. First, we find that the education level of a firm’s workforce is positively associated with its IPO offer price. Specifically, institutional investors appear to bid up the value of IPOs during the roadshow when the firm’s workforce is more highly educated, and that this increase in firm value is not reversed by the broader market on the IPO date. This suggests that investors place a higher value on firms when their employees are of higher quality. Second, we find no association between employee education levels and future profitability, suggesting that the increase in value is not due to higher future cash flows. Finally, we find that employee education levels are negatively associated with a firm’s cost of capital. These last two results collectively suggest that, even though employee quality has no effect on a firm’s future cash flows, it reduces the discount rate that investors apply to those cash flows. Overall, we find that investors place a premium on firm value when the firm has a higher quality workforce, and that this premium appears to be due to the fact that firm risk is lower.

Author

• Patrick Woong Ryu, University of Georgia