Employee Sentiment and Stock Returns

Abstract

We propose an employee sentiment index, which complements investor sentiment and manager sentiment indices and find that high employee sentiment predicts a subsequent low monthly market return, significant both in- and out-of-sample. This predictability is also present at the weekly level and can deliver sizable economic gains for mean-variance investors in asset allocation. Employee sentiment impact is more likely to be stronger among employees who work in the headquarters’ state and among less experienced employees. The economic driving force of the predictability is distinct: high employee sentiment leads to high contemporaneous wage growth due to immobility, which subsequently results in lower firm cash flow and lower stock returns.