Extending the theories of employee incentives and inalienability of human capital, we investigate the link between a firm‘s engagement in employee relations and the returns to shareholders around mergers and acquisitions (M&As). Using firm-level data on employee-engagement in an international sample of 4,565 M&A deals from 48 countries, we find that an acquirer‘s employee-engagement – especially in terms of monetary incentives – is positively related to shareholder returns in domestic deals, but this relationship turns negative in cross-border deals. Workforce diversity, training and development, and health and safety do not affect shareholder returns around M&As. Consistent with the notion of the inalienability of human capital and employment policies, we find that the attenuating effect in cross-border deals is stronger when uncertainty about post-merger labor integration and transferability of employment policies across firms and countries is higher. These results hold after controlling for country-level differences in labor regulations and that most effects of employee-engagement on shareholder returns are driven by the acquirer rather than the target. Moreover, they persist in terms of long-run post-merger profitability.
Sterling Professor of Law
Yale Law School
Professor of Finance
Korea University Business School
IESE Business School