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21 May 2020 CFA Institute Journal Review

Crowdsourced Employer Reviews and Stock Returns (Summary)

  1. Sandra Krueger, CFA

CFA Institute Journal Review summarizes "Crowdsourced Employer Reviews and Stock Returns," by T. Clifton Green, Ruoyan Huang, Quan Wen, and Dexin Zhou, published in Journal of Financial Economics, Vol. 134, No. 1 (October 2019).

Should employee job satisfaction matter to investors? The authors examine crowdsourced employer ratings data and discover that changes in these ratings help forecast one-quarter-ahead earnings surprises. Firms experiencing improvements in employee ratings outperform firms with declines. The authors’ findings point to potential investment opportunities.

What Is the Investment Issue?

The authors explore the relationship between crowdsourced employer reviews and stock returns. Employees are aware of employer nonpublic information that could change their perspective of their employers. Although brokerage houses routinely monitor executive (insider) stock transaction data, whether rank-and-file employees possess information that is useful for equity analysts is not apparent.

Employees can rate and review their employer online at These reviews offer portfolio managers a way to uncover useful firm information. Employees generally evaluate their own satisfaction, but employee ratings may be influenced by the firm’s economic environment.

How Did the Authors Conduct This Research?

The authors study more than one million employee reviews for more than 1,200 firms from the recruiting site Glassdoor, whose one- to five-star ratings are merged with the Center for Research in Securities Prices and Compustat databases to provide stock return and accounting information. The earnings forecasts used come from I/B/E/S data, while institutional holdings data are drawn from Thomson Reuters. The research is conducted over the eight-year period from September 2008 to September 2016.

The research sample contains firms with an average market capitalization of $23.8 billion, so the analysis leans toward larger firms with high institutional ownership. The average employer rating is 3.2 stars (with 1 being low and 5 high). Summary statistics show that the information captured by changes in employer ratings is distinct from the information provided by firm insiders such as senior management and directors.

The authors begin by constructing three portfolios based on quarterly changes in ratings. Portfolio 1 consists of firms experiencing a decrease in employee satisfaction, Portfolio 2 includes firms with no change in satisfaction, and Portfolio 3 comprises firms experiencing an increase.

Glassdoor reviews contain employee-authored ratings across six components of employee satisfaction: Career Opportunities, Compensation & Benefits, Work-Life Balance, Culture & Values, Senior Management, and Business Outlook. The authors again rank and divide stocks into three portfolios based on the amount of change the firms experience in each subcategory. The three portfolios are rebalanced quarterly.

What Are the Findings and Implications for Investors and Investment Professionals?

The authors find that aggregating changes in employee satisfaction reveals information about firm fundamentals. A portfolio comprising firms experiencing significant improvements in employee satisfaction outperforms portfolios with flat or declining satisfaction. Likewise, firms characterized by reductions in employee satisfaction are shown to underperform. The authors examine market beta, size, and book-to-market ratio and other firm traits but find that these measures do not accurately forecast changes in employer ratings. Their evidence suggests that the information contained in employee reviews is fundamentally different from earnings analyst or insider trading assessments, and since the information is mostly perceived by market participants with a lag, the consequent return predictability effects are   inconsistent with perfect market efficiency.

The authors show that owning a portfolio of stocks with positive changes in employee ratings and selling stocks with negative changes in employee ratings results in a significant average monthly alpha of 0.84% The components of the employee ratings that produce the strongest differential are “Changes in the Senior Management” yielding 0.71% abnormal monthly return and “Changes in Career Opportunities” yielding 0.65%.

The information contained in rating changes is short term and suggests that market participants underreact to employee reviews when forecasting earnings.

The authors suggest that changes in employer ratings capture underlying shifts in sales growth and operating performance. Changes in employee satisfaction are influenced by fundamental changes at the firm that markets do not immediately incorporate into the share price. Consequently, investors may be able to significantly increase alpha by using employee-authored ratings in their investment models.

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