Employee sentiment and stock returns

Abstract

We propose an employee sentiment index, complementing investor sentiment and manager sentiment indices, and find that high employee sentiment predicts low monthly (weekly) market returns significantly both in- and out-of-sample. The predictability can also deliver sizable economic gains for mean-variance investors in asset allocation. The impact of employee sentiment is found stronger among employees who work in the headquarters state and are less experienced. The economic driving force of the predictability is unique: high employee sentiment leads to high contemporaneous wage growth due to immobility, which subsequently results in lower firm cash flow and lower stock returns.