Corporate Employee-Engagement and Merger Outcomes Hao LIANG, Singapore Management University Luc Renneboog, Tilburg University Cara Vansteenkiste, Tilburg University Corporate Employee-Engagement and Merger Outcomes GCGC Tokyo June 2017

Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Motivations Corporations represent a nexus of implicit and explicit contracts between shareholders and stakeholders Employees as important stakeholders matter for firm value Involved in daily operations Have contractual claims on firm revenue Influence corporate decision making and governance Labor unions, board representations, ESOP, strikes, political lobbying, etc. How do they matter? Important questions for managers and policymakers On-going debate on the roles of shareholders vs. stakeholders in corporate governance During my presentations of my CSR papers, people keep on asking: what is CSR, who are stakeholders? Why should we care?

Motivations Different views on the roles of employees Labor as a cost: Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Motivations Different views on the roles of employees Labor as a cost: Labor maximizes different objective functions than that of shareholders Strong labor protections entrench employees and constitute substantial costs to shareholders (e.g., Gorton and Schmid, 2004; Dessaint, Golubov, Volpin, 2015; Levine, Lin, and Shen, 2015) Manager-employee collusion (e.g., Pagano and Volpin, 2005; Cronqvist et al., 2009)

Motivations Different views on the roles of employees Labor as a cost: Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Motivations Different views on the roles of employees Labor as a cost: Labor maximizes different objective functions than that of shareholders Strong labor protections entrench employees and constitute substantial costs to shareholders (e.g., Gorton and Schmid, 2004; Dessaint, Golubov, Volpin, 2015; Levine, Lin, and Shen, 2015) Manager-employee collusion (e.g., Pagano and Volpin, 2005; Cronqvist et al., 2009)

Motivations Different views on the roles of employees Labor as a cost: Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Motivations Different views on the roles of employees Labor as a cost: Labor maximizes different objective functions than that of shareholders Strong labor protections entrench employees and constitute substantial costs to shareholders (e.g., Gorton and Schmid, 2004; Dessaint, Golubov, Volpin, 2015; Levine, Lin, and Shen, 2015) Manager-employee collusion (e.g., Pagano and Volpin, 2005; Cronqvist et al., 2009) Labor as human capital: Employees are important human capital resources Employee satisfaction increases labor productivity, thus firm performance (Akerlof, 1982,1984 ; Edmans, 2011, 2012; Edmans, Li, & Zhang, 2015)

Motivations Different views on the roles of employees Labor as a cost: Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Motivations Different views on the roles of employees Labor as a cost: Labor maximizes different objective functions than that of shareholders Strong labor protections entrench employees and constitute substantial costs to shareholders (e.g., Gorton and Schmid, 2004; Dessaint, Golubov, Volpin, 2015; Levine, Lin, and Shen, 2015) Manager-employee collusion (e.g., Pagano and Volpin, 2005; Cronqvist et al., 2009) Labor as human capital: Employees are important human capital resources Employee satisfaction increases labor productivity, thus firm performance (Akerlof, 1982,1984 ; Edmans, 2011, 2012; Edmans, Li, & Zhang, 2015)

Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Motivations To date, mixed theoretical predictions and empirical evidence Limited data The roles of employees vary significantly across countries Existing studies mostly deal with US or German firms, in which the contracting environment is very unique We extend the theories of employee incentives and inalienability of human capital (Hart & Moore, 1994; Bolton, Wang & Yang, 2016) We utilize a newly-assembled dataset on firm engagement in employee-related issues for large companies around the world Employment quality (compensation, job security, etc.); workforce diversity; workforce health and safety; training and development

Hypothesis The inalienability of human capital Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Hypothesis The inalienability of human capital Entrepreneurs and employees cannot irrevocably commit themselves to the firm, and their skills are not easily transferable The benefits and costs of employee engagement depend on to what extent the roles of employees are transferable across firms and environment The inalienability of employment policies Frictions in transferring employee-related policies, stemming from inalienability of human capital Employee engagement can enhance labor productivity & firm value when inalienability is low Employee engagement can be costly when inalienability is high Greater uncertainties regarding employee integration and labor contracts during a firm’s restructuring can be counter-productive

Hypothesis We focus on takeovers Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Hypothesis We focus on takeovers An event which forces firms to restructure workforce and reallocate assets across firms A firm’s commitment to explicit and implicit contracts with stakeholders (e.g. employees) play a prominent role in wealth gains and losses We focus on announcement abnormal returns by acquirer Since we focus on stakeholder-shareholder relations in terms of shaping firm value In an efficient market, value change from expected synergy gain is reflected in share price We focus on two types of takeovers Domestic v.s. Cross-border Reflecting different levels of uncertainties regarding employee integration and motivation Map the inalienability of human capital & employment policies

Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Preview of the Results Among different aspects of employee engagement, employment quality (monetary incentives and job security) is positively correlated with announcement returns Overall, stronger employment quality is related to higher CARs, but this effect is attenuated if the deal is cross-border i.e., the correlation is positive in domestic deals, and negative for cross-border deals Channels: incentives and uncertainties (inalienability) Effects mostly come from monetary incentives, rather than job security The attenuating effect in cross-border deals are weaker when uncertainties about employee integration and employment policy consistency are reduced Repeat acquisition in the same country Target country is more right-wing oriented Target country cultures are more incentive-oriented and less union-oriented Long-run operating performance is consistent with short-run CARs

Data and Method Data on employee engagement: ASSET4 (ESG database) Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Data and Method Data on employee engagement: ASSET4 (ESG database) Global coverage of 5,000+ large public companies We focus on the social pillars (rather than environment and governance) Raw values and standardized scores (0-100) Data on takeover deals: SDC Sample: 2,009 acquiring firms from 48 countries engaged in 4,565 M&A deals over 2003-2014 Key DV: cumulative abnormal returns (3-day CARs) Labor regulation indices: Botero, Djankov, La Porta, Lopez-de-Silanes, Shleifer (2004, QJE) Employment laws index (contracts, dismissal, working hours, etc.) Collective relations laws index (union power, collective disputes, etc.) Social security laws index (retirement, death, sickness, unemployment benefits) Civil rights index

Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Data and Method

E E S S G G Data and Method Employment Quality Health & Safety Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Data and Method E E S S G G Employment Quality Health & Safety Training & Development Diversity (Not Human Capital) Note: all scores are industry demeaned (range: 0 to 100 , mean/median = 50) Source: http://www.trcri.com/

Descriptive Statistics Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Descriptive Statistics Variables N Mean Median St. Dev. Min. Max. Difference Domestic Deals Cross-Border Deals   Panel A: Labor Orientation Variables (Acquirer) Workforce Diversity 2,550 49.81 45.61 31.40 4.830 98.67 2,015 56.66 57.80 30.94 6.11 98.79 -6.84*** Employment Quality 49.31 47.92 29.91 2.950 98.45 58.64 64.75 30.40 2.88 98.57 -9.34*** Health & Safety 45.50 38.62 29.60 2.800 99.44 58.09 58.22 30.27 3 99.49 -12.59*** Training & Develop. 47.97 45.29 31.25 5.160 97.40 61.66 72.34 29.49 5.16 97.39 -13.69*** Bonus Plan Dummy 0.386 0.486 1 0.478 0.499 -0.09*** Fringe Benefits Dummy 0.436 0.495 0.442 0.496 -0.006 Salary Gap Ratio 3.194 3.967 10.05 454.8 2.448 6.477 253.2 0.74*** Lay-Offs Ratio 0.0111 0.396 20 0.033 1.293 58.04 -0.02 Trade Union Perc. 41.05 43.06 17.30 100 43.83 15.23 -2.78*** Controversies Dummy 0.0209 0.143 0.025 0.157 -0.004 Panel B: Deal-level Variables Acquirer CAR -0.246 -0.219 4.275 -12.13 13.42 0.159 0.0284 4.027 -0.41*** Public Target 0.193 0.395 0.147 0.354 0.07*** Diversifying 0.485 0.500 0.398 0.490 0.09 Hostile Deal 0.009 0.0946 0.012 0.111 -0.003 All-Cash Financing 0.411 0.492 0.369 0.483 0.04*** Multiple Bidders 0.177 0.041 0.199 -0.01 Toehold 0.154 0.361 0.106 0.308 0.05*** Relative Deal Size 0.169 0.032 0.007 3.28 0.0206 0.604 20.07 0.01 Panel C: Firm-level Variables Acquirer Leverage 0.443 0.406 0.257 -0.005 1.000 0.429 0.388 0.253 0.001 0.01* Acquirer ROA 0.110 0.0986 0.105 -0.972 2.209 0.127 0.118 0.093 -0.60 0.645 -0.02*** Serial Acquirer 0.217 0.412 0.300 0.458 -0.08*** Acquirer Size (USD Mil) 38,906 6,925 123,507 249.9 1,107,776 65,855 8,733 186,56 -35,010***

Descriptive Statistics Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Descriptive Statistics Variables N Mean Median St. Dev. Min. Max. Difference Domestic Deals Cross-Border Deals   Panel A: Labor Orientation Variables (Acquirer) Workforce Diversity 202 52.98 50.00 30.17 8.260 97.35 160 58.63 58.43 28.12 10.21 97.94 -5.65* Employment Quality 54.42 59.34 29.83 3.520 97.78 62.36 70.76 28.79 3.330 97.81 -7.94** Health and Safety 48.89 44.13 28.87 10.23 98.99 59.65 59.77 28.60 10.57 98.84 -10.75*** Training and Development 55.01 63.28 30.98 5.200 96.58 60.28 73.57 30.45 5.190 96.45 -5.27 Panel B: Deal-level Variables Target CARs 6.307 3.185 12.02 -41.00 53.12 7.386 2.491 12.54 -12.48 55.21 -1.08 Weighted CARs 1.321 0.524 4.014 -5.140 12.15 1.166 0.541 3.729 0.15 Panel C: Firm-level Variables Target ROA 0.301 0.0998 1.533 -6.680 10.63 0.299 0.110 1.426 -2.540 12.23 0.002 Relative Deal Size 0.699 0.553 0.604 0.00237 3.278 0.461 0.001 4.930 0.24*** Target Size (USD Mil) 29,567 6,985 60,273 48.10 289,603 25,006 5,661 57,277 89.30 4,561 Panel D: Country-level Variables (Target) Employment Laws Index 0.324 0.218 0.182 0.164 0.809 0.394 0.282 0.200 0.828 -0.07*** Collective Relations Laws Index 0.343 0.259 0.161 0.188 0.667 0.349 0.159 -0.006 Social Security Laws Index 0.678 0.646 0.0677 0.400 0.873 0.704 0.692 0.0741 -0.03*** Civil Rights Index 0.685 0.733 0.0918 0.807 0.654 0.109 0.500 0.850 0.03***

Corporate Employee-Engagement and Acquirer Announcement CAR Dependent Variable: Acquirer CAR [-1,+1] (1) (2) (3) (4) (5) Cross-Border 1.178*** 0.537* 0.771*** 0.522* 1.013*** (0.294) (0.279) (0.272) (0.299) (0.352) Acquirer Employment Qualityt-1 0.00659**   0.00767** (0.00307) (0.00354) Acquirer Employment Qualityt-1 × Cross-Border -0.0132*** -0.0161*** (0.00432) (0.00516) Acquirer Health & Safetyt-1 0.00178 -0.000178 (0.00316) (0.00385) Acquirer Health & Safetyt-1× Cross-Border -0.00189 0.00158 (0.00427) Acquirer Workforce Diversity-1 0.00417 0.00436 (0.00286) (0.00375) Acquirer Workforce Diversity-1× Cross-Border -0.00618 -0.00498 (0.00400) (0.00515) Acquirer Training & Developmentt-1 0.000167 -0.00601 (0.00303) (0.00396) Acquirer Training & Developmentt-1× Cross-Border -0.00142 0.00918 (0.00578) Observations 4,565 R-squared 0.037 0.035 0.036 0.038 Firm & Deal Level Controls Yes Year FE No Acquirer Industry FE Target Industry FE Acquirer Country Level Controls Target Country Level Controls Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

Unbundling Employee Incentives Mechanism: corporate employee-engagement (esp. employment quality) affects employee incentives & productivity We decompose Employment Quality score into 2 categories Monetary incentives Bonus plan, fringe benefits, employee/CEO wage ratio, etc. Job security incentives Trade union relations, new job creation (net of layoff), other job security policy Matches the dichotomy by Herzberg et al. (1959) – motivational factors vs. maintenance factors Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

Unbundling Employee Incentives Dependent Variable: Acquirer CAR [-1,+1] Panel A: Monetary Incentives (1a) (2a) (3a) Cross-Border 0.701*** 0.745*** 0.496***   (0.190) (0.185) (0.139) Acquirer Bonus Plan Dummy t-1 0.360* (0.196) Acquirer Bonus Plan Dummy t-1 × Cross-Border -0.566** (0.261) Acquirer Fringe Benefits Dummy t-1 0.452** (0.211) Acquirer Fringe Benefits Dummy t-1 × Cross-Border -0.649** (0.254) Acquirer Wage Ratio Employees/CEO t-1 0.106** (0.048) Acquirer Wage Ratio Employees/CEO t-1 × Cross-Border -0.118* (0.072) Observations 4,565 R-squared 0.036 0.037 0.024 Deal, Firm, and Country Controls Yes Year FE Acquirer and Target Industry FE Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

Unbundling Employee Incentives (Cont.) Panel B: Job Security Factors Dependent Variable: Acquirer CAR [-1,+1] Panel B: Job Security Factors (1b) (2b) (3b) Cross-Border 0.417** 0.433*** 0.464***   (0.169) (0.144) (0.145) Acquirer Trade Union Relations Policy t-1 -0.158 (0.215) Acquirer Trade Union Relations Policy t-1 × Cross-Border 0.106 (0.282) Acquirer Net Employment Creation t-1 -0.098 (0.254) Acquirer Net Employment Creation t-1 × Cross-Border 0.186 (0.288) Acquirer Job Security Policy t-1 -0.114 (0.320) Acquirer Job Security Policy t-1 × Cross-Border -0.258 (0.418) Observations 4,565 R-squared 0.033 0.035 Deal, Firm, and Country Controls Yes Year FE Acquirer and Target Industry FE Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

Inalienability of Human Capital and Employment Policies in C-B Takeovers Mechanism: Cross-border frictions induce uncertainties about employee integration and consistency of employment policies of the merging firms, which exemplify the inalienability of employment policies Empirical proxies for such uncertainties Repeat acquisition in the target country Target country’s remuneration culture (wrt the importance of “good pay”) Economic nationalism in the target country (left-wing government) Strength of labor union in acquirer’s and target’s countries Low-tech deals (both acquirer and target are in low-tech industries) Distinct from labor regulation differences Use Botero et al. (2004 QJE) labor regulation indices Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

Inalienability of Employment Policies in Cross-Border Deals Dependent Variable: Acquirer CAR [-1,+1] (1) Repeat Acquirer (2) Importance of Good Pay (3) Economic Nationalism (4) Confidence in Unions (5) Low-Tech Deal Acquirer Employment Quality t-1 -0.011*** -0.008*** -0.043** -0.009*** -0.016*** (0.004) (0.003) (0.017) (0.006) Acquirer Employment Quality t-1 × Repeat Acquisition 0.014*   (0.008) Acquirer Employment Quality t-1 × (Target Country > Acq. Country “Good Pay is Important”) 0.027** (0.013) Acquirer Employment Quality t-1 × (Absence of Economic Nationalism in Target Country) 0.037** (0.018) Acquirer Employment Quality t-1 × (Acquirer and Target Country Low Union Strength) 0.018** (0.009) Acquirer Employment Quality t-1 × Low-Tech Deal 0.015** Observations 2,015 R-squared 0.061 0.036 0.034 0.033 Main effect Yes Acquirer & Target Country-Level Controls Deal and Firm Controls Year FE Acquirer & Target Industry FE Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

Difference of Labor Regulations between Acquirer and Target Countries 　Dependent Variable: Acquirer CAR [-1,+1] (1) (2) (3) (4) (5) Acquirer Employment Quality -0.007** -0.006** -0.005* (0.003) Difference Acquirer-Target Employment Laws Indices -0.387 -0.061 (0.829) (0.695) Acquirer Employment Quality × Difference Acquirer-Target Employment Laws Indices 0.006 -0.002 (0.012) (0.010) Target Country Collective Relations Laws Index 0.098 -0.449 (0.864) (0.792) Acquirer Employment Quality × Difference Acquirer-Target Collective Relations Laws Indices  0.003 0.012 (0.013) Target Country Social Security Laws Index 1.004 0.694 (1.260) (1.037) Acquirer Employment Quality × Difference Acquirer-Target Social Security Laws Indices -0.019 -0.020 (0.019) (0.015) Target Country Civil Rights Index 0.030 0.454 (1.225) (1.001) Acquirer Employment Quality × Difference Acquirer-Target Civil Rights Indices -0.001 (0.018) Observations 1,819 R-squared 0.028 0.029 Deal and Firm Controls Yes Year FE Acquirer & Target Industry FE Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

Other Robustness Tests Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Other Robustness Tests Relation between employee-engagement measures and takeover likelihood is economically trivial IV approach: using peer firms’ (industry-year) average salaries & benefits as IV for the focal firm’s employment quality Effects are stronger when acquirers have high-level employment quality scores, regardless of targets’ employment quality Alternative channels – none are significant Difference in labor regulations between A’s and T’s countries Geographical distance between A’s and T’s countries Common language of A’s and T’s countries Cultural difference between A’s and T’s countries (World Value Survey) Acquirer’s human rights scores High Employment Quality score in domestic deal (not driven by over-engagement) To be done: more refined measures of inalienability (Tate & Yang, 2016)

Long-Run Operating Performance Dependent variable: (1) 2-Year Post-Merger Acquirer ROA (2) 2-Year Post-Merger Acquirer ROS (3) 2-Year Post-Merger Acquirer Sales/Employee Cross-Border 1.736** 0.385 1.150* (0.796) (0.270) (0.666) Acquirer Employment Quality 0.014* 0.002 0.012 (0.008) (0.001) (0.010) Acquirer Employment Quality x Cross-Border -0.024** -0.004* -0.020** (0.012) (0.002) (0.009) Pre-Merger Acquirer ROA (industry-adj.) 0.069***   (0.025) Pre-Merger Acquirer ROS (industry-adj.) 0.526** (0.259) Pre-Merger Sales/Employees Ratio (industry-adj.) 1.224*** (0.200) Deal, Firm, and Country Controls Yes Observations 1,113 2,478 85 R-squared 0.094 0.010 0.809 Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Conclusions Corporate employee-engagement, especially employment quality w.r.t. monetary incentives is significantly related to shareholder value during a firm’s acquisition Employment quality is strongly related to shareholder value, but the effect differs between domestic vs. cross-border deals Inalienability of human capital and employment policies Low in domestic deals; high in cross-border deals The attenuating effect of cross-border is stronger if uncertainties regarding employee integration and consistency of employment policies are greater Employee engagement has material impact on firm profitability in the long run and is priced by the market