Financial Capital and Human Capital in American Corporations: How Ownership by Activist Hedge Funds and Index Investors Affects Employee Satisfaction
Kim, Eun Woo
2020
Abstract
Two major trends in the American capital market affect whether firms adopt a long-term or a short-term orientation. The first trend is the growing concentration of ownership of public companies by index investors, such as Blackrock, Vanguard, and State Street, which are decade-long stockholders. The second is the growing control of activist hedge funds on corporate boards, whose median holding period is known to be around 20 months. What do these trends mean for employee relations? This dissertation tests whether ownership by activist hedge funds, which have a relatively short-term investment time horizon, negatively affect employee satisfaction by reducing managerial attention to employees while increasing managerial attention to shareholders and stock market performances. This dissertation also tests whether a concentrated ownership by large index investors, which has a relatively long-term investment time horizon, positively affects employee satisfaction by increasing managerial attention to employees while reducing managerial attention to shareholders and stock market performances. I answer these questions by studying all publicly traded US companies from 2008 to early 2018, and by using big data – firms’ annual reports and anonymous employer reviews on Glassdor.com. More specifically, I developed new measures for firms’ attention to their human capital and its management practices by conducting text analysis of the risk factors section of the annual report where firms list their anticipated risks. Additionally, I analyze the relationship between employee satisfaction and firms’ financial performance. The results of my analyses show that ownership by most activist hedge funds and large index funds do not have a direct effect on employee satisfaction. However, ownership by Gamco Investors, one of the most active hedge funds in terms of the number of campaigns, reduces employee satisfaction. These findings suggest that activist hedge funds may have different strategies and goals, which affect employee satisfaction differently. These results also suggest that large index funds’ engagement with their portfolio firms on human capital issues is limited, leaving us with a question about the role of the powerful investors. This dissertation also found that shareholders affect managerial attention, such that ownership by activist hedge funds increased managerial attention to shareholders, and ownership by large index funds reduced managerial attention to firms’ stock market performance. Firms’ attention to employees was only reduced when firms were under Gamco Investors’ ownership. Additionally, ownership by activist hedge funds led managers to give less consideration to how employee issues can be associated with future cost. On the other hand, ownership by large index funds led managers to be less concerned about their employees as important resources for the firms. Finally, the results show that employee satisfaction is not the cause of firms’ financial performance, but rather the consequence of high firm performance. This dissertation contributes to the corporate governance and human capital management literature by examining labor implications of currents trends in shareholder ownership. Also, it makes a practical contribution to organizational researchers, investors, policy makers, and employees who need standardized measures for firms’ attention to human capital and human capital management practices and performances.Subjects
activist hedge funds index funds human capital management managerial attention risk factors employee satisfaction
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