1. 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

2. 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?

3. 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)

4. 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)

5. 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)

6. 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)

7. 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

8. 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

9. 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

10. 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

11. 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
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

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

13. 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:

14. 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***

15. 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
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***

16. 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 ** **
( )
( )
Acquirer Employment Qualityt-1 × Cross-Border
***
***
( )
( )
Acquirer Health & Safetyt-1
( )
( )
Acquirer Health & Safetyt-1× Cross-Border
( )
Acquirer Workforce Diversity-1
( )
( )
Acquirer Workforce Diversity-1× Cross-Border
( )
( )
Acquirer Training & Developmentt-1
( )
( )
Acquirer Training & Developmentt-1× Cross-Border
( )
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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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)

24. 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

25. 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