Henry Hansmann Yale Law School GCGC June 2017 Comments on "Corporate Employee-Engagement And Merger Outcomes” by Hao Liang, Luc Renneboog, and Cara Vansteenkiste Henry Hansmann Yale Law School GCGC June 2017

An Ambitious Project Seeks to determine whether various workplace reforms increase or decrease shareholder value. The introduction mentions, among other reforms, increasing employee participation in company governance. E.g., voting for directors, works councils, employee stock ownership But the paper doesn’t pursue employee control. Just workplace conditions

Four Measures of Employee Engagement Employment Quality Employment benefits and job conditions, avoiding lay-offs, and maintaining relations with trade unions. Health and Safety Concern for physical and mental health, well-being, and stress levels of employees. Workforce Diversity Work-life balance, a family friendly environment, and equal opportunities regardless of age, gender, ethnicity, religion, or sexual orientation., Training and Development Education for the workforce. Scores run from 0 to 100 with larger values indicating better employment relations.

A Selection Problem? Data source for workplace practices: Thomson Reuters ASSET4 ESG Database. Must companies agree to be included?

What Is “Inalienability”? Authors proceed “by focusing on a key issue in corporate finance, namely the inalienability of human capital . . . Hart and Moore, 1994 . . . .” Their definition: “Inalienability” stands for the fact that, e.g. in the case of acquisition, a buyer of a firm cannot change the human capital employed at a target company without frictions nor can it change the contracts that a target firm has voluntarily . . . adopted.”

Inalienability cont’d Two (true) things seem to be involved here: (1) You can’t sell your capabilities Better analogy: Grossman & Hart 1986? Acquirer and target employees are bound by target’s contracts with its employees. Perhaps better to refer to both as “inflexibility.”

Methodology: Use CARs upon Merger Announcements to Measure Value of Labor Relations to Shareholders Announcement of merger with a target firm, and the target’s labor relations, are assumed to be unexpected Value of merger will depend upon interaction between the two firms’ labor relations Stock market will quickly assess value of the merger to the acquirer, including labor relations Will go into CAR for acquirer’s stock With enough data and control variables the labor relations components can be teased out

Results The first of the four labor relations variables – compensation and job security – is significantly correlated with CARs for the acquirer. The other three labor variables aren’t significant.

Seems Odd Why would returns to acquirer’s shareholders go up upon a merger when the acquirer’s wages and job security are unusually high? Why are there any significant results at all? Most acquisition surplus goes to targets And the authors don’t have data on most targets Hard to detect impact of merger on acquirer price because acquirer is generally larger than target.

Another Theory Unusually prosperous firms like Google, Amazon, and Facebook, which have hit on a remunerative business strategy, tend to share the rents with their workers They also make many acquisitions, where their strategy also increases profits So when they announce a merger that wasn’t expected, their stock price goes up So firms that are generous with employees tend to also have high CARs upon announcing mergers But there’s in fact no causation either way This theory is also consistent with authors’ finding of stronger effect of employment quality when firm engages in multiple acquisitions

Merger Data Questions The U.S. accounts for 27% of the merger observations. If we remove the U.S. from the sample, what happens to the results? If we add the UK, Australia, and Canada, the share goes up to 50%. Do we have civil law versus common law countries again?

Conclusion The alternative interpretation that I offer may well be false. But I offer it as evidence that other potential interpretations may not be hard to find. Which is particularly important because the authors’ own interpretation seems counterintuitive. The authors also offer bold interpretations of other findings I haven’t discussed, including findings of no significance. Perhaps more caution is called for. A real-world example or two would also be helpful.