European Management Journal xxx (xxxx) xxx

Contents lists available at ScienceDirect

European Management Journal

journal homepage: www.elsevier.com/locate/emj

Job satisfaction and investment efficiency – Evidence from crowdsourced

employer reviews
Susanne Arvidsson a, Brigitte Eierle b, Sven Hartlieb b, *
a
Lund University, Sweden
b
University of Bamberg, Germany

A R T I C L E I N F O A B S T R A C T

JEL classification: This study investigates the effect of job satisfaction on investment efficiency. To operationalize job satisfaction
G30 empirically, we employ a novel measure based on crowdsourced employer reviews. Considering the as yet under-
J28 researched and less regulated private firm setting, in which internal characteristics such as employee satisfaction
M14
should play a more important role for corporate actions, we find that our measure for job satisfaction has a
M40
positive impact on investment efficiency. High job satisfaction seems to alleviate problems related to moral
Keywords:
hazard and adverse selection resulting from information asymmetries, which ultimately improves corporate
Job satisfaction
Investment efficiency
investment efficiency. We further show that high job satisfaction reduces particularly the likelihood of under­
Moral hazard investment, where profitable investment projects are not carried out. Our study demonstrates the importance of
Information asymmetry cultivating a positive workplace environment with contented employees, which does benefit fundamental
Private firms corporate actions.

1. Introduction In this study, we investigate the impact of job satisfaction on in­

A key success factor for corporations is whether capital is allocated to
the best investment projects (e.g., Zhang et al., 2016). In a perfect
market, corporations take all profitable investment opportunities
(Modigliani & Miller, 1958). However, in the real world with imperfect
markets, various factors militate against optimal investment levels (e.g.,
Biddle et al., 2009; Gomariz & Ballesta, 2014). In particular, agency
conflicts and information asymmetries resulting in moral hazard and
adverse selection might lead to situations in which firms do not have
access to sufficient capital for funding investment opportunities with
positive net present value (NPV) (underinvestment) or in which man­
agers undertake unprofitable investment projects (overinvestment) for
personal motives such as empire building (e.g., Biddle et al., 2009). The
extant literature reveals that a great deal of effort has been spent on
identifying factors that influence the level of investment efficiency.
These factors include the following: the executive compensation struc­
ture (Eisdorfer et al., 2013); capital structure (Pawlina, 2010); mana­
gerial ability (Gan, 2019); financial reporting quality (e.g., Biddle et al.,
2009; Gomariz & Ballesta, 2014); board independence (Rajkovic, 2020);
external auditor characteristics (Bae et al., 2017); and corporate social
responsibility (CSR) (e.g., Benlemlih & Bitar, 2018; Cook et al., 2019).
vestment efficiency. Job satisfaction refers to the assessment of how the
current job is perceived by an individual member of a firm (e.g., Coff,
1997; Schneider & Vaught, 1993). This attitude developed by in­
dividuals toward their job can be affected by various factors such as
payment, working environment, firms’ CSR activities, supervision, co­
workers, promotion, and the work itself (Coff, 1997; Bayarcelik & Afa­
can Findikli, 2016).
Job satisfaction can affect investment efficiency via different chan­
nels. Management literature highlights that job satisfaction may reduce
agency conflicts and, thus, mitigate adverse behavior (Flammer & Luo,
2017). Derived from psychology theories, corporate decision-makers
who appreciate their job should behave in ways that foster or support
the firm (e.g., Judge & Larsen, 2001). Hence, opportunistic behavior
under moral hazard should play a less pronounced role in firms where
job satisfaction is high, as corroborated by empirical literature (e.g., Ji
et al., 2017). However, decision-makers in firms with high job satis­
faction should not only intrinsically act less opportunistically, but the­
ories from organizational research also indicate that a high level of
satisfaction within a company leads to a positive work group context (i.
e., a positive work environment), where there is a higher degree of
cohesiveness, helping behavior, and sense of morality (e.g., Kidwell &

* Corresponding author. University of Bamberg, Germany.

E-mail addresses: susanne.arvidsson@fek.lu.se (S. Arvidsson), brigitte.eierle@uni-bamberg.de (B. Eierle), sven.hartlieb@uni-bamberg.de (S. Hartlieb).

https://doi.org/10.1016/j.emj.2022.10.007
Received 30 April 2021; Received in revised form 28 July 2022; Accepted 27 October 2022
Available online 31 October 2022
0263-2373/© 2022 Elsevier Ltd. All rights reserved.

Please cite this article as: Susanne Arvidsson, European Management Journal, https://doi.org/10.1016/j.emj.2022.10.007
S. Arvidsson et al.
Valentine, 2009). Thus, job satisfaction relating to the group context
may act as a disciplining device that substitutes for external monitoring
and can be associated with higher investment efficiency by reducing
moral hazard. A well-documented moral hazard problem in the context
of corporate investments is ‘empire building’, which refers to the
expansion of a firm that is not economically justified, but instead driven
by opportunistic managerial motives such as compensation and prestige
(e.g., Hope & Thomas, 2008). Hence, job satisfaction should constrain
overinvestment issues due to fewer problems with managerial moral
hazard, which is the basis of our first hypothesis.
However, reduced moral hazard problems and less opportunistic
managerial behavior due to job satisfaction might also lead to less un­
derinvestment. Managers who are satisfied with their job might be more
willing to spend more effort on looking for profitable investment pro­
jects. Moreover, they are less likely to refrain from conducting a prof­
itable investment project just to avoid the threat of personal damages
with respect to reputation and job security in the unlikely event that a
project turns out to be unprofitable (Myers, 1977; Ward et al., 2020).
Information asymmetries also exist between the firm and outside
capital providers, which may lead to a situation of adverse selection in
advance of borrowing transactions. Capital providers anticipating
problems of moral hazard are likely to react by charging higher
financing fees and constraining their capital supply. It is well known that
firms with less severe moral hazard problems provide more disclosures
that are of higher quality (e.g., Chung et al., 2002; Hui & Matsunga,
2015), and they have more effective communication with external
stakeholders (e.g., Huang et al., 2017). Capital providers are likely to
recognize this reduced risk and lower information asymmetry by facil­
itating access to capital for firms with high job satisfaction (Biddle et al.,
2009; Lambert et al., 2011; Stiglitz & Weiss, 1981).
Furthermore, agency conflicts apply not only to a firm’s management
but also its employees (Chen & Huang, 2006). Human resource theories
suggest that in firms where moral hazard is less pronounced and em­
ployees are more satisfied, there should be a higher motivation to
contribute to firm success (e.g., Huang et al., 2015; Maslow, 1943),
which is in line with empirical evidence (e.g., Fauver et al., 2018; Huang
et al., 2015). Because of information asymmetries and limited moni­
toring, capital providers use financial information (e.g., credit ratings
and financial covenants) to determine the cost of capital and general
access to external funding. This is why job satisfaction should also secure
the ability to engage in profitable investment decisions via improved
firm performance (e.g., Adams et al., 2003; Jiang, 2008), in line with
empirical evidence which finds that firms with higher job satisfaction
among employees exhibit lower cost of debt (Chi & Chen, 2021). Sum­
marized, job satisfaction may also decrease underinvestment issues,
which forms the basis of our second hypothesis.
In our study, we consider a sample of German private firms to
investigate the relationship between job satisfaction and investment
efficiency. In Germany, private firms – also known as the German
‘Mittelstand’ – play a crucial role for the overall economy (e.g.,
Audretsch & Elston, 1997). We exploit the institutional features of this
German setting, particularly in regard to the comprehensive availability
of private firms’ financial statement information (e.g., Bassemir, 2018).
Considering the effect of job satisfaction in a private firm setting pro­
vides an ideal basis for this study since corporate actions (including
investment activities) are less influenced by external governance
mechanisms such as stricter regulation (e.g., enforcement), financial
intermediaries (e.g., financial analysts and institutional investors), and
other market forces (e.g., takeover threats) (e.g., Chen et al., 2011; Hope
et al., 2012; Minnis & Shroff, 2017). Accordingly, focusing on private
firms is ideal for empirically investigating the effect of job satisfaction,
in that there are fewer alternative effects caused by other (external)
influencing factors, which is why for instance the threat of omitted
variable bias should be less pronounced in this setting.
To measure job satisfaction empirically, we follow a recent stream of
literature (e.g., Chi & Chen, 2021; Huang et al., 2015) and make use of
2
European Management Journal xxx (xxxx) xxx
employer reviews from a large online employer rating website. More
precisely, employees can comprehensively rate their employer on the
basis of 13 different dimensions such as teamwork, compensation, work
climate, social responsibility, and work-life-balance, which is in line
with the definition that job satisfaction comprises a variety of factors
(Coff, 1997). For our main analyses, we compute an aggregate job
satisfaction score based on the 13 dimensions. From hand-collected re­
views, almost 9700 for 237 firms, empirical results corroborate our
hypotheses that job satisfaction is positively associated with investment
efficiency.
We also demonstrate that this relationship is primarily driven by
reduced underinvestment problems. Hence, high job satisfaction with
motivated and contented employees seems particularly to prevent
liquidity shortfalls by facilitating access to capital. Since job satisfaction
is expected to increase disclosure quality and the effectiveness of
communication to external stakeholders (e.g., Huang et al., 2017; Ji
et al., 2017), reduced information asymmetries between firms and
outside capital providers, and therefore lower adverse selection prob­
lems, seem to be the key drivers. Moreover, since satisfied employees are
expected to be more motivated to support their employer (i.e., there are
fewer problems related to moral hazard), higher firm performance and
corresponding easier access to capital seemingly forms a key channel.
The effect of job satisfaction on overinvestment is statistically insignif­
icant, indicating that managerial opportunism to pursue self-serving
motives that are not in the interests of the firm and its stakeholders,
such as empire building, does not play a dominant role. This is probably
because agency conflicts in terms of opportunistic management
behavior are generally less important in the private firm setting due to
ownership structure (e.g., Gao et al., 2013).
In additional tests, we explore which of the individual job satisfac­
tion dimensions captured by our aggregate variable are the dominant
drivers for our findings. We find that various dimensions have a signif­
icant bearing on underinvestment problems, supporting the view that
job satisfaction is a very broad concept, and that there is no specific
individual dimension that drives investment decisions. As one excep­
tion, social responsibility has no significant impact on underinvestment.
This seems reasonable because CSR activities reflect in particular top
management’s social and ethical values (e.g., Hemingway & Maclagan,
2004), with any unethical managerial behavior regarding investment
decisions often giving rise to empire building and overinvestment (Gul
et al., 2020). The negative relationship between job satisfaction and
underinvestment is also robust to a variety of sensitivity tests.
Our study extends existing literature in a number of important ways.
Firstly, to our knowledge, this is the first study that explores how job
satisfaction affects investment efficiency. Specifically, with our measure
of job satisfaction based on crowdsourced employer reviews, we intro­
duce a relatively novel variable to corporate investment literature. This
also means that our study differs from that of Benlemlih and Bitar (2018)
who have investigated the impact of CSR. CSR is a broader concept than
job satisfaction that to some extent also comprises employee treatment
and which should therefore be closely related to employees’ job satis­
faction. (e.g., Dahlsrud, 2008; Fauver et al., 2018). In their survey study,
Wisse et al. (2018) show that CSR activities may have a positive influ­
ence on job satisfaction, but, at the same time, they also stress that these
are two different concepts. CSR activities are primarily set by top
management and addressed to the public (Wisse et al., 2018), so that the
resulting reports may contain proclaimed values only and not those that
are actually present within the company.1 Measures of job satisfaction
based on more direct surveys and employer reviews, by contrast, allow
in-depth insights into actual internal firm attributes such as social
values, coherence, and motivation among managers as well as their staff,
1
In line with this, Benlemlih and Bitar (2018) use CSR ratings based on in­
formation from a number of external resources such as financial reports or
articles in the business press.
S. Arvidsson et al.
which is particularly important when considering investment efficiency
that is primarily determined by internal agency conflicts. This is also
supported by Guiso et al. (2015) who argue that employee perceptions
matter for actual firm performance (including investment efficiency),
while proclaimed corporate values appear as being irrelevant (Huang
et al., 2015).
Secondly, investment efficiency literature has – apart from a few
exceptions (e.g., Chen et al., 2011) – primarily focused on publicly listed
firms. Private firms are predominant in most economies, but as yet we
generally know comparatively little about their corporate actions (see
Chen et al., 2011).2 Private firms are significantly different from public
firms with respect to various characteristics such as the nature of agency
conflicts, which is why we cannot simply rely on findings for public
companies when we want to understand investment efficiency within
private firms, in line with a statement from Langli and Svanström (2014,
p. 149) according to whom “differences that exist between private and
public companies are so large and fundamental that without careful
consideration we cannot rely on findings for public companies”.3
Finally, whilst the role of job satisfaction measured by employer
reviews has received increased attention over recent years (e.g., Hope
et al., 2021; Huang et al., 2015; Ji et al., 2017; Khavis & Krishnan, 2021;
Li, 2022), this literature stream has almost entirely disregarded the
private firm setting. We argue that this setting is ideal for such a study
given that there are fewer alternative effects caused by, for example,
stricter regulations and more financial market coverage (e.g., Chen
et al., 2011). Hence, since investment decisions should be affected by
fewer (external) influencing factors in this setting, from an empirical
perspective it is easier to isolate the effect of job satisfaction, which as an
internal factor might generally play a more pronounced role here. Our
investigation provides evidence that job satisfaction also matters for
fundamental corporate actions in private firms.
Our study is structured as follows. The next section presents theo­
retical background information and hypotheses development, followed
by our explanation of the setting considered. We then describe the
methodology employed to test our hypotheses together with the sample
and data analyzed. Empirical results are presented in the succeeding
section, before we close the study with conclusions and limitations.
2. Theoretical background and hypotheses development
2.1. Investment efficiency
Under the neo-classical framework, managers make corporate in­
vestment decisions to maximize firm value (e.g., Hayashi, 1982; Yosh­
ikawa, 1980). In particular, the Modigliani and Miller (1958) theorem
posits that profitable investment opportunities constitute the only driver
of corporate investments (Benlemlih & Bitar, 2018). Under this para­
digm, firms should conduct all investments with positive NPV and
continue to invest until the marginal benefit of investment equals the
marginal cost. Hence, this postulates a frictionless market not only in
which firms obtain financing for positive NPV projects at the prevailing
economy-wide interest rate and return excess cash to investors, but also
in which managers will generally act in the best interests of the firm (e.
g., Biddle et al., 2009; Hayashi, 1982).
However, from a Keynesian perspective, corporate investments are
also likely to be determined by various other factors such as financial
security, firm growth, and behavioral issues (e.g., Baddeley, 2017;
2 put in more efforts to avoid being laid off (Edmans, 2011, similar
To illustrate the economic importance of private firms around the world:
Private companies generate 50% of private sector GDP in the U.S. (Minnis,
2011), and small- and medium-sized private firms represent more than 99% of
European firms (Federation of European Accountants, 2016).
3
With this statement, Langli and Svanström (2014) particularly refer to the
financial statement audit of private firms, but this can in our opinion also be
transferred to understanding investment decisions by private firms.
3
European Management Journal xxx (xxxx) xxx
Gordon, 1992). Particularly when considering information asymmetries
under the agency framework (Jensen & Meckling, 1976), it should be
noted that firms may deviate from optimal investment levels (e.g.,
Biddle et al., 2009; Gomariz & Ballesta, 2014). A vast amount of liter­
ature has consequently challenged the idea of perfect financial markets,
where all positive NPV projects are financed and carried out (e.g., Ağca
& Mozumdar, 2008; Hubbard, 1998). Instead, market imperfections are
found to induce the undertaking of negative NPV projects (over­
investment) and profitable investments opportunities being postponed
or omitted (underinvestment) (e.g., Biddle et al., 2009).
In the presence of information asymmetries together with limited
monitoring opportunities, models of moral hazard suggest that man­
agers and employees have incentives to behave in ways that are detri­
mental to shareholders and capital providers (e.g., Biddle et al., 2009;
Jensen & Meckling, 1976). A well-documented managerial moral hazard
problem in the context of corporate investments is ‘empire building’,
which refers to managers’ motives to conduct unfavorable investment
projects and grow the firm beyond its optimal size with the purpose of
maximizing their personal welfare in regard to power, compensation,
and prestige (e.g., Chen et al., 2012; Hope & Thomas, 2008; Jensen,
1986). This can result in overinvestment, where managers of firms with
ample capital select bad projects.
Models of adverse selection also postulate that managers (ex-ante)
take advantage of information asymmetries during the course of a
negotiation. Managers are better informed than capital providers about
the firm’s operating activities, financial conditions, and future prospects
(Biddle et al., 2009). Although capital providers will carefully scrutinize
the firms’ financial condition and can gain access to public information
and information directly from the firm, there is always private infor­
mation that only managers possess (Chi & Chen, 2021). Because of
limited monitoring capabilities, managers of constrained firms are able
to exploit this advantage at the expense of capital providers, for
example, by engaging in earnings management or high-risk investment
projects. However, rational capital providers anticipate this behavior
which is detrimental to their own interests and hence constrain their
capital supply or provide capital only at higher rates (e.g., Biddle et al.,
2009; Hubbard, 1998; Lambert et al., 2011; Stiglitz & Weiss, 1981). This
in turn can result in underinvestment problems because firms are forced
to bypass attractive investment opportunities that they would otherwise
have undertaken.
2.2. Job satisfaction and investment efficiency
Job satisfaction relates to the assessment of how the current job is
perceived (e.g., Coff, 1997; Schneider & Vaught, 1993). More precisely,
Locke (1976, p. 1304) defines job satisfaction as “a pleasurable or pos­
itive emotional state resulting from the appraisal of one’s job or job
experiences”. This attitude developed by individuals toward their jobs
can be positive or negative in terms of various factors connected with the
tasks they are performing, such as payment, working environment, su­
pervision, coworkers, promotion, and the work itself (Coff, 1997;
Bayarcelik & Afacan Findikli, 2016). Accordingly, job satisfaction is a
broad concept, which may be variously associated with corporate in­
vestment efficiency, as we now discuss in greater detail.
Management literature highlights that job satisfaction may reduce
the likelihood of adverse behavior (e.g., Flammer & Luo, 2017;
Schneider & Vaught, 1993; Vroom, 1964). Individuals who are satisfied
with their job are less likely to quit and are usually more motivated,
identify with their employer, internalize company objectives and, thus,
Edmans, 2012). Accordingly, in cases where people perceive their cur­
rent employment to be superior in comparison to other job alternatives,
they are more likely to act in the interests of the firm. In a similar vein,
social psychology theories argue that people evaluating an attitude ob­
ject favorable tend to behave in a way that foster or support it (Judge &
Larsen, 2001).
S. Arvidsson et al.
In line with these arguments, empirical research finds that em­
ployees who are satisfied with their jobs are less likely to engage in theft
or fraud and display higher effort as well as attentiveness (e.g., Organ &
Ryan, 1995; Huang et al., 2015; Trevino & Weaver, 2001). With respect
to finance and accounting, Ji et al. (2017) for example report that firms
with higher job satisfaction among employees are less likely to be
engaged in financial misconduct. Thus, employees who are satisfied
with their jobs are less likely to take advantage of information asym­
metries so that the moral hazard problem should be less pronounced.
Based on this discussion, contented decision-makers should be less likely
to consider self-serving motives but instead act in the best interests of the
firm and its stakeholders. With respect to investment decisions, execu­
tives with high job satisfaction should in particular be less likely to
consider personal empire building motives to expand the firm, even if
the corresponding investments are not expected to be profitable in the
long term.
Furthermore, decision-makers in companies with high job satisfac­
tion should not only intrinsically behave more in line with companies’
interests, but job satisfaction should also affect this behavior by creating
a positive work group environment. Theories from organizational
research suggest that such an environment, where employees “…
perceive the presence of encouraging work conditions that enhance their
attitudes about the workplace, including the perceived degree of cohe­
siveness, helping behavior, and peer leadership” (Kidwell & Valentine,
2009, p. 17), has a positive impact on work behavior by reinforcing
normative performance and attitudes. Thus, some elements of job
satisfaction related to the group context, as for example cohesiveness,
may act as a disciplining device by constraining adverse behavior and,
thus, provide a substitute for external monitoring. In line with this
argumentation, research finds that the group context influences em­
ployees’ behavior and attitudes, including beliefs about work perfor­
mance in general and the execution of their own jobs specifically
(Kidwell & Valentine, 2009). Besides the ‘tone at the top’ theory, which
describes an organization’s ethical climate as being established and
monitored by top management (e.g., Schwartz et al., 2005), literature
argues that a ‘bottom-up’ approach also needs to be considered (e.g.,
Hess & Broughton, 2014; Hill & Rapp, 2014; McDonell, 2011).
Following this latter approach, ethical behavior throughout a firm is also
significantly established by employees (i.e., ‘blue-collar workers’). In a
similar vein, Campbell and Shang (2022) consider the ‘tone at the bot­
tom’ and show that corporate misconduct can be identified on the basis
of employee comments. Hence, if a positive group context via social
norms substitutes for external monitoring, it should also be associated
with lower overinvestment problems (due to empire building incentives)
by reducing moral hazard.
To summarize, high job satisfaction in a company should lead to
investment decisions that are less likely to be influenced by opportu­
nistic empire building motives linked to unprofitable investment pro­
jects, both because content decision makers act intrinsically more in the
interest of the firm and because satisfied personnel can act as a corporate
governance mechanism. In other words, job satisfaction should curb
overinvestment issues because there are fewer moral hazard problems,
which leads us to our first hypothesis as follows:
H1. Job satisfaction is negatively associated with overinvestment
However, reduced moral hazard problems and less opportunistic
managerial behavior due to job satisfaction, as discussed earlier, might
impact not only overinvestment but also underinvestment. It requires
substantial effort by managers to continually evaluate investment pro­
jects and look for projects with positive NPV, which is why unmotivated
managers in high agency conflict firms might refrain from making this
effort and rather enjoy the ‘quiet life’ (e.g., Bertrand & Mullainathan,
2003; Ward et al., 2020). Since managers are evaluated in accordance
with the ex-post profitability of projects instead of ex-ante mean of the
projects’ returns and actual managerial effort, they might also refrain
from investing in risky investment projects even though they are
4
European Management Journal xxx (xxxx) xxx
expected to have a positive NPV. Managers might be keener to avoid the
risk of reputational damage and job security issues rather than engaging
in promising investments that might also turn out to be unprofitable
(Myers, 1977; Ward et al., 2020).
Moreover, information asymmetries between the firm and outside
capital providers may lead to adverse selection in advance of borrowing
transactions. Capital providers anticipating problems of moral hazard
will react by charging firms higher financing cost and constrain their
capital supply, which may then lead to underinvestment problems. If job
satisfaction reduces incentives to engage in value destroying activities
and take advantage of information asymmetries when raising capital, as
assumed by the discussion above, it should also reduce information
asymmetries. It is well known that firms with less severe moral hazard
problems provide more disclosures that are of higher quality (e.g.,
Chung et al., 2002; Hui & Matsunga, 2015),4 and that higher disclosure
quality then reduces firms’ cost of debt (e.g., Sengupta, 1998). In that
regard, the empirical finding of Ji et al. (2017) is crucial. They report
that the financial reporting quality of firms with high employee satis­
faction is indeed higher. Moreover, particularly in debt contracting,
private communication also plays an important role in reducing infor­
mation asymmetries (e.g., Cascino et al., 2014; Chen, 2016). Job satis­
faction is found to be significant in enhancing the accuracy and
effectiveness of communication, not only within a firm but also from the
perspective of external stakeholders (e.g., Huang et al., 2017). Hence,
with higher quality of corporate disclosures and more efficient
communication, information asymmetries between firms and capital
providers should be lower, which alleviates the problem of adverse se­
lection and facilitates access to external capital in order to conduct
profitable investment projects. In other words, capital providers are
likely to recognize this reduced risk and lower information asymmetry,
which consequently encourages them to increase their capital supply (at
lower cost) (Biddle et al., 2009; Lambert et al., 2011; Stiglitz & Weiss,
1981).
Moreover, whilst agency theory has mainly focused on management
behavior, the theory is applicable to any jobs within a firm that are
difficult to monitor, which also includes employee behavior (Chen &
Huang, 2006). Hence, employers are confronted with the problem of
moral hazard associated with employee behavior, because employees
might exploit information asymmetries by providing lower performance
if they are not adequately treated (Chen & Huang, 2006). Since the
problem of moral hazard is less pronounced among firms with high job
satisfaction, employees are expected to be more motivated and more
likely to act in the best interests of firms. Employees are considered as
key organizational assets (e.g., Maslow, 1943), and human resource
theories argue that employee satisfaction can benefit firms by
strengthening motivation and retention (Huang et al., 2015). In line
with this, empirical research finds that firms with higher job satisfaction
benefit from higher firm performance (e.g., Fauver et al., 2018; Huang
et al., 2015), excess long-term returns, and higher firm values in the long
run (Edmans, 2011, 2012). In general, capital providers will only be
willing to finance an investment project if they believe that a company is
able to successfully implement a positive NPV project (e.g., Garcia Lara
et al., 2016). Moreover, capital providers bear a credit risk, namely that
the money borrowed will not be repaid, and they cannot perfectly
monitor the debtor due to information asymmetries, which is why they
heavily rely on financial information about the debtor (for instance,
aggregated in a credit rating score or key performance indicator) for
their decision to supply capital and for determining the corresponding
cost of debt (e.g., Adams et al., 2003; Cascino et al., 2014; Jiang, 2008).
Financial performance not only matters during the negotiation of a
4
In fact, high-quality corporate disclosures are considered as a key instru­
ment to reduce information asymmetries, which is why enforcement of
disclosure rules are frequently discussed in research and practice (e.g., Versano,
2020).
S. Arvidsson et al. European Management Journal xxx (xxxx) xxx

borrowing transaction but firms also need to perform continually in more important for capital providers’ contracting decisions in the pri­
order to keep the cost of debt low and secure capital availability, for vate firm setting compared to the publicly listed firm setting.
instance, due to financial covenants integrated in lending agreements (e. Finally, as explained above, one channel for the relationship between
g., Cascino et al., 2014; Gârleanu & Zwiebel, 2009; Smith Jr. 1993). job satisfaction and investment efficiency suggests that more satisfied
Hence, job satisfaction should also secure firms’ ability to engage in decision makers are less likely to act opportunistically (such as making
profitable investment decisions via better access to capital due to inefficient investment decisions), and that people who like their jobs are
improved performance. This is in accordance with recent empirical ev­ generally more motivated and perform better in order to avoid losing
idence that firms with more satisfied employees incur lower cost of debt their valued positions. This argument should be particularly relevant in
(Chi & Chen, 2021). a private firm setting, where the labor market is less efficient than that of
To summarize, job satisfaction may also improve a firm’s access to public companies (Durand & Vargas, 2003).
capital due to mitigating problems of moral hazard and adverse selec­ However, it is also important to consider that privately held firms are
tion, thereby decreasing underinvestment issues. This leads to our sec­ usually more closely controlled by owners who often take more active
ond hypothesis as follows: roles in management (e.g., Chen et al., 2011). Indeed, partially there is
no separation between management and ownership. According to
H2. Job satisfaction is negatively associated with underinvestment
Alchian and Woodward (1988), ex-post uncertainty and contract
incompleteness are reduced to a minimum in private firms controlled by
3. Institutional setting: private firms in Germany
the owner(s) and not an assigned agent. Opportunistic behavior is
reduced because the members in such a firm setting share the same
We investigate the impact of job satisfaction on investment efficiency
conditions/wishes and therefore focus on promoting positive corporate
using a sample of German private firms. Whilst private firms dominate
actions to increase their own wealth (Fama & Jensen, 1983). This union
and play a vital role in the world economy, as yet in general terms we
of ownership and control thus reduces the (managerial) moral hazard
know comparatively little about their corporate actions (e.g., Chen et al.,
problem, the likelihood of self-utility maximization by the agents, and,
2011), for instance, for reasons of data availability. Considering private
more importantly for this study, an inefficient use of resources (Fama &
firms is therefore relevant, and we argue that for a number of reasons
Jensen, 1983). Based on this notion of reduced moral hazard, Durand
such consideration is especially appropriate for our research question.
and Vargas (2003) argue and find evidence for owner-controlled private
By definition, privately held firms do not participate in public stock
firms being more efficient than those led by agents. However, for one
markets. Such markets are highly regulated, and participants are subject
thing, not all private firms are owner-managed, and, secondly, infor­
to stringent external regulations and enforcement (e.g., Minnis & Shroff,
mation asymmetries between debt capital providers and the manage­
2017). Publicly listed firms’ activities are also more restricted by
ment and between regular staff and firms are still prevalent in the
external market forces such as takeovers threats, which help to control
private firm setting.
agency conflicts (Hope et al., 2012). Moreover, in the public firm setting,
Germany provides an ideal setting because private firms are
external financial intermediaries such as financial analysts and institu­
considered to play a more important role for the German economy than
tional investors play significant governance roles (e.g., Sun, 2009). In
in other nations such as the US or UK (Audretsch & Elston, 1997; private
the private firm setting, external governance mechanisms and regulation
firms in Germany are often also termed as the German ‘Mittelstand’ and
are less pronounced, which is why internal firm characteristics and
are considered as the backbone for Germany’s economic success). More
informal institutions, such as job satisfaction, should play more impor­
importantly, the institutional system in Germany guarantees that
tant roles for private firms in mitigating moral hazard.
financial information is publicly available for German private firms,
Furthermore, private firms’ financial reports are not as widely
with more than one million being legally required to disclose financial
distributed to the public, and they are not required to disclose as much
statements publicly on an annual basis (Bassemir, 2018). Data avail­
information as publicly listed clients (e.g., Badertscher et al., 2013;
ability is a key challenge when studying private firms (e.g., Langli &
Burkart et al., 2003; Chen et al., 2011; Hope et al., 2012). This may
Svanström, 2014) and is therefore central for conducting this study. In
impact capital providers’ monitoring abilities and in turn increase
Germany, as a typical code law jurisdiction, financial accounting is
problems of adverse selection and moral hazard. Accordingly, major
traditionally regulated by law. Legal consequences and disclosure re­
capital providers do not usually rely on published financial statements
quirements for private firms are largely dependent on a firm’s size. Large
only but also have insider access to private firms’ corporate information
private firms based on size criteria within the German Commercial Code
(e.g., Van Tendeloo & Vanstraelen, 2008; Chen et al., 2011). The rela­
(GCC) are generally required to disclose financial reports to the same
tionship between private firms and external stakeholders is therefore
extent as publicly listed clients, and the financial data is provided online
also considered as less formal, and communication is expected to be
by the Federal Gazette (in German: ‘Bundesanzeiger’). Finally, there is a
more important and efficient (e.g., Habib et al., 2018; Herda & Lavelle,
large employer rating website available in Germany that publicly pro­
2015; Hope et al., 2011). Finance theory argues that especially banks
vides employee reviews for German private firms. We use these reviews
have superior information-processing abilities and better access to pri­
for our comprehensive job satisfaction measure, which we detail in the
vate information than other capital providers (e.g., Cascino et al., 2014;
following section.
Chen, 2016; Fama, 1985). Banks are important sources of finance for
private firms (Svanström, 2013), which applies particularly to our
4. Research design
setting of private firms in Germany, that are traditionally much more
bank-oriented than in other jurisdictions such as the U.S., where equity
4.1. Measurement of job satisfaction
financing and public debt providers (i.e., bonds) play a more pro­
nounced role.5 Hence, since capital providers are less likely to rely on
To examine our hypotheses, it is crucial to utilize appropriate data
publicly disclosed financial information only and have closer relation­
for measuring job satisfaction. Such data is usually difficult to obtain and
ships to private firms with access to insider information, nonfinancial
requires either a comprehensive survey program among firm members
factors such as job satisfaction and employee motivation might become
or the implementation of many in-depth interviews (e.g., Schneider &
Vaught, 1993). We followed a recent stream of research and made use of
employer reviews from large online employer rating websites, which
5
Expressed in figures, 88.3% of the debt capital for German firms stem from have become more famous in recent decade (e.g., Chi & Chen, 2021;
bank loans while the vast majority (86.4%) of debt capital for U.S. firms is from Huang et al., 2015; Huang et al., 2017; Ji et al., 2017; Li, 2022). More
public debt (i.e., bonds) (Bendel et al., 2016). precisely, we hand-collected employer reviews from Kununu, which is

5
S. Arvidsson et al.
the largest website in German-speaking countries where current and
former employees (both regular staff and executives) can anonymously
rate their employers.6 Employees can rate companies on the basis of 13
different dimensions on a scale from one to five: (1) Working Atmo­
sphere, (2) Support by Management, (3) Teamwork, (4) Challenging
Tasks, (5) Communication, (6) Gender Equality, (7) Attitude Toward
Older Colleagues, (8) Career Development, (9) Fair Compensation, (10)
Workplace Environment, (11) Social/Environmental Consciousness,
(12) Work-Life-Balance, and (13) Company Image. The average across
all dimensions forms the overall rating for each review.7 In essence,
these reviews reflect employees’ opinions/judgements and workplace
experiences. As such, they can serve as a comprehensive and direct
measurement of overall job satisfaction as experienced by firm mem­
bers. The validity of such reviews as measures of job satisfaction was
further confirmed by prior literature (Landers et al., 2019). Our final
measure (Satisfaction) is calculated as the mean across all reviews for
each firm and ranges from one to five (low to high satisfaction,
respectively).
4.2. Investment efficiency model
To measure investment efficiency empirically, we follow recent
literature (Benlemlih & Bitar, 2018; Gomariz & Ballesta, 2014) and rely
on an indirect approach introduced by Biddle et al. (2009) and Chen
et al. (2011).8 These studies predict the ‘normal’ level of investments
and then estimate the deviation from this expected optimum to assess
the level of inefficiency. More precisely, they estimate the level of in­
vestment in the following year as a function (1) of growth opportunities
(measured as growth in sales) in the current year, and the level of in­
vestment inefficiency is captured by the residuals in the error term as
follows:
Investmenti,t = α0 + α1 Sales Growthi,t− 1 + εi,t (1)
Investment is defined as the net increase in tangible and intangible
assets, scaled by lagged total assets. Sales_Growth is the rate of change in
sales between t-2 and t-1. The model is estimated cross-sectionally for
each industry year (Fama/French 12-industry classification).9 Since in­
vestment inefficiency might result from both under- and overinvestment
issues, we take the absolute values of residuals from these regressions for
our main measure of investment inefficiency (Inv_Inefficiency). Hence,
higher values for Inv_Inefficiency denote lower investment efficiency. We
differentiate between the two scenarios (under-vs. overinvestment) in
an additional test to investigate our hypotheses H1 and H2.
In our main regression model (2), we then regress Inv_Inefficiency on
our job satisfaction variable (Satisfaction) to investigate our overall
research question in the following:10
Inv Inefficiencyi,t = β0 + β1 Satisfactioni + β2 Sizei,t + β3 Leveragei,t
+ β4 Tangibilityi,t + β5 Cashflowi,t + β6 Cash Si + β7 RoA Si
+ β8 Employeesi,t + β9 Lossi,t + β10 Agei + β11 IMRi,t + year fixed effect
+ industry fixed effects + εi,t
(2)
Our coefficient of interest in this model is β1 on Satisfaction, for which
6
In the U.S., the employer rating website Glassdoor is more prevalent.
7
In some cases, the employees did not rate all 13 dimensions. In these cases,
we calculated the average based on the remaining items. For firms with a high
number of reviews (ten or more), we remove outlier values (one percent tails).
Our results remain qualitatively the same without this procedure.
8
For an overview of empirical ways to measure investment efficiency, please
refer to Gao and Yu (2020).
9
We require at least 10 observations per industry year.
10
All variables are defined in Appendix A. To mitigate the effect of outliers, all
continuous variables are winsorized at 0.5% tails.
6
European Management Journal xxx (xxxx) xxx
we expect to find a negative estimate based on our two hypotheses. We
also follow prior empirical literature and include a number of control
variables for factors that are expected to have a potential impact on
corporate investment activities (e.g., Benlemlih & Bitar, 2018; Biddle
et al., 2009; Chen et al., 2011; Gomariz & Ballesta, 2014). As a proxy for
firm size, we use the natural logarithm of total assets (Size). Further­
more, we include a control variable for the number of employees (Em­
ployees). We also include a measure for firm age because more mature
firms might carry more experience in investment activities, which could
increase investment efficiency (Age). We include a variable for the use of
debt (Leverage) since firms with higher leverage might have more dif­
ficulties in obtaining additional debt financing, which would increase in
particular underinvestment problems. We expect the same for unprof­
itable firms, which is why we additionally include a loss dummy (Loss).
We calculate the firm-level standard deviation in return on assets
(RoA_S) since performance persistence might affect not only the avail­
ability of internal funds but also access to debt. Since the variance in
cash available should also have an impact on investment activities, we
compute the firm-level standard deviation in cash and cash equivalents
(Cash_S). Next, the ratio of tangible assets to total assets (Tangibility) is
included as a measure for bankruptcy costs (Biddle & Hilary, 2006). We
also control for the level of cashflows (Cashflow) because high cashflows
might lead to overinvestment activities (agency conflicts and empire
building).
Moreover, we include the inverse Mills (IMR) ratio generated as
based on a two-stage Heckman approach. With this approach, we follow
prior literature (Huang et al., 2015, 2017) and aim at mitigating po­
tential selection bias for our sample firms. More specifically, there might
be concerns that our sample firms with (sufficient) employer reviews
available are systematically different from firms without sufficient
employer reviews, particularly with respect to their investment effi­
ciency. As a first-stage instrument, we include the industry average of
employee review availability (i.e., of the dummy variable Ind_Em­
ployee_Assessment_Indicator, which is coded one for firms with at least
three reviews) to satisfy the exclusion restriction. While this instrument
should be associated with the firm-level availability of employer re­
views, it is unlikely to have a direct impact on the relationship between
employer reviews and the investment efficiency in a specific firm. We
report the first-stage probit regression model in Appendix B. We find the
expected positive and significant loading for Ind_Em­
ployee_Assessment_Indicator. Furthermore, firms with a higher number of
employees and lower performance volatility are more likely to have
sufficient employer reviews available. The area under the Receiver
Operating Characteristic curve (ROC) amounts to 0.77, which is above
the critical threshold of 0.70 (Hosmer & Lemeshow, 2000), confirming
the accuracy of our probit regression model. We include the Inverse
Mills Ratio (IMR) based on this model in all following second-stage re­
gressions to control for possible systematic sample selection effects.
Finally, we add industry (Fama/French 12-industry classification)
and year dummies to control for any unobservable time and industry
effects. In all tests, we use robust standard errors adjusted for hetero­
scedasticity and clustering of observations. More precisely, we follow
Petersen (2009) and cluster standard errors at firm level.
4.3. Data and sample
In our study, we focus on (German) private firms to explore the as-yet
under-researched impact of job satisfaction on corporate investment
efficiency. We hand collected all data for our job satisfaction variable
from the employer rating website Kununu. Financial data was retrieved
from the Bureau van Dijk DAFNE database based on information dis­
closed in the Federal Gazette. The starting point for our sample selection
is all group accounts from privately held companies in Germany for the
period 2010–2017 (total number of firms: 721) that have disclosed
German GAAP financial reports and have at least 80 employees each. We
start in 2010 to avoid any bias caused by a substantial accounting
S. Arvidsson et al. European Management Journal xxx (xxxx) xxx

reform, the ‘Accounting Law Modernization Act’ (in German: ‘Bilanz­
rechtsmodernisierungsgesetz’ – ‘BilMoG’), which became effective in
2009. Our final sample thus covers the period 2012–2017 since our
investment efficiency measure requires two prior years for the calcula­
tion of the prior year’s sales growth rate.
This preselection approach results in 3424 firm years from 428
parent companies and facilitates the comprehensive hand collection for
our job satisfaction measure, since there are unlikely to be sufficient
reviews available for single firms with only a few employees. Accord­
ingly, for the remaining 428 companies, we manually checked the
Kununu website for employee reviews. To be included in our final
sample, firms must have at least three reviews available on Kununu.
Furthermore, each firm must have at least one review from a current
employee. Kununu features reviews from both former and current em­
ployees. For our main analyses, we consider reviews from both former
and current employees, since people who have left the company also
give important insights into job satisfaction and work environment
within a firm (Graham et al., 2018). However, since reviews from former
employees might generally be more negative, we did not use firms with
reviews solely from former employees. These selections reduce the
sample to 2256 observations from 282 firms. Finally, we exclude all
observations with missing data for our model variables, which leads to
our final sample consisting of 1006 observations from 237 privately held
parent companies. The job satisfaction ratings for these 237 firms are
based on 9683 hand-collected employer reviews from Kununu.
5. Results
5.1. Descriptive statistics
In Table 1, we report distributional properties of our model vari­
ables. The mean job satisfaction for our sample firms is 3.36 on a range
from 1 to 5. The interquartile spread of Satisfaction ranges from 2.98 to
3.75, indicating some variation across our sample firms. Other
descriptive statistics show, for instance, a tangibility ratio of 19% and an
average leverage ratio of 40%. The mean for Loss further indicates that
for 17% of our observations, firms report negative income.
In Table 2, we show additional and more detailed descriptive sta­
tistics for our job satisfaction variable. Here, we present distributional
properties not only for the aggregate variable but also for all 13 un­
derlying dimensions, for which we find highest scores as follows:
teamwork (3.728); attitudes toward older colleagues (3.678); along with
challenging and interesting work (3.617). The three items with the
lowest scores are as follows: management behavior (3.119); career
prospects for growth and professional development (3.071); as well as
communication (3.014). We further show mean values for firm-year
observations classified as efficient and inefficient regarding the firms’
investment activities (based on a median split). These results provide
support for our hypotheses. Using univariate t-tests, we find that job
satisfaction is significantly higher (at the 5% level) for firms with
efficient investment activities (3.400 vs. 3.312). For the individual
satisfaction dimensions, we find significant differences for 11 of the 13
dimensions, which again suggests that job satisfaction and investment
activities are significantly associated with each other. We find the
highest difference for work climate (Efficient: 3.388; Inefficient: 3.263),
whereas there is no significant difference for teamwork and work
conditions.
In Table 3, we report univariate correlations among our model var­
iables. We do not find any critical correlations above/below the 0.8/-0.8
level. To address multicollinearity concerns, we conduct further diag­
nostic tests in all regression models, and variance inflation factors are
generally below the critical level of 10. Multicollinearity should there­
fore not be a severe concern in our study. The correlation coefficient
between our variables of interest Inv_Inefficiency and Satisfaction is
negative and significant both for the Pearson (− 0.088) and Spearman
(− 0.075) correlation. This again corroborates our hypotheses that high
job satisfaction should be associated with more investment efficiency.
Furthermore, the pairwise correlations between Satisfaction and RoA_S
as well as Loss are negative and significant indicating, in line with prior
evidence, that firms with a high job satisfaction exhibit a more stable
performance and are less likely to incur financial losses.
5.2. Main empirical findings
We test our hypotheses that job satisfaction is associated with the
level of investment efficiency by running our main multivariate
regression model (2), the corresponding results for which are reported in
Table 4. Following our hypotheses, the coefficient β1 for our job satis­
faction measure (Satisfaction) is negative and statistically significant at
the 0.1 level (t = − 1.88). This suggests that firms with higher levels of
job satisfaction exhibit greater investment efficiency. This is in accor­
dance with our argument that high job satisfaction should reduce the
problems associated with moral hazard and adverse selection resulting
from information asymmetries. Accordingly, our results show that even
after controlling for a variety of other firm factors, job satisfaction has an
important effect on corporate activities in our private firm setting.
Coefficients for the control variables are generally in line with prior
evidence (e.g., Benlemlih & Bitar, 2018; Chen et al., 2011; Gomariz &
Ballesta, 2014). Firms with high leverage (Leverage), negative income
(Loss), and more fluctuating cash levels (Cash_S) have less efficient in­
vestments, probably because they suffer from underinvestment issues.
The positive coefficient for Cashflow indicates agency conflicts that in
particular might result in overinvestment problems. Moreover, our re­
sults suggest that larger firms (Size and Employees) are more efficient in
their investment decisions. Finally, in line with prior literature, Tangi­
bility is negatively associated with investment efficiency. The co­
efficients for the remaining variables (Age and RoA_S) are not
statistically different from zero, which is also consistent with most of the
prior evidence. Furthermore, IMR is insignificant, indicating that there
are no systematic differences between our sample firms and other firms

Table 1
Distributional properties.
Mean SD P1 P25 Median P75 P99

Inv_Inefficiency 0.03 0.04 0.00 0.01 0.02 0.03 0.22

Satisfaction 3.36 0.55 2.00 2.98 3.42 3.75 4.51
Size 11.64 1.13 9.62 10.79 11.49 12.37 14.64
Leverage 0.40 0.21 0.02 0.23 0.40 0.56 0.91
Tangibility 0.19 0.20 0.00 0.06 0.14 0.24 0.87
Cashflow 0.09 0.07 − 0.12 0.06 0.09 0.13 0.28
Cash_S 7.68 13.20 0.04 1.02 3.23 8.16 62.08
RoA_S 0.04 0.04 0.00 0.02 0.03 0.04 0.17
Employees 2.14 5.54 0.10 0.42 0.75 1.65 23.38
Loss 0.17 0.37 0.00 0.00 0.00 0.00 1.00
Age 3.78 0.78 1.79 3.30 3.78 4.26 5.12

Note: All continuous variables are winsorized at 0.5% tails. All variables are defined in Appendix A.

7
S. Arvidsson et al. European Management Journal xxx (xxxx) xxx

Table 2
Descriptive statistics cultural items by investment efficiency.
Full Sample Inefficient = 1 Inefficient = 0

Mean SD Mean Mean Difference

Satisfaction 3.356 0.551 3.312 3.400 − 0.087**

Work_Climate 3.326 0.657 3.263 3.388 − 0.125***
Management_Behavior 3.119 0.669 3.065 3.173 − 0.108**
Teamwork 3.728 0.495 3.703 3.752 − 0.049
Interesting_Work 3.617 0.590 3.576 3.658 − 0.083**
Communication 3.014 0.610 2.974 3.053 − 0.079**
Gender_Equality 3.482 0.579 3.445 3.519 − 0.074**
Older_People 3.678 0.589 3.632 3.725 − 0.093**
Career_Opportunities 3.071 0.662 3.014 3.127 − 0.112***
Fair_Compensation 3.241 0.665 3.189 3.293 − 0.104**
Work_Conditions 3.450 0.623 3.428 3.471 − 0.042
Eco_Social_Responsibility 3.351 0.633 3.302 3.399 − 0.097**
Work_Life 3.258 0.638 3.221 3.296 − 0.075*
Image 3.431 0.717 3.384 3.478 − 0.095**

Note: ***, **, and * indicate two-sided significance at the 0.01, 0.05, and 0.1 levels, respectively.

Table 3
Correlation matrix.
A B C D E

A: Inv_Inefficiency ¡0.075 − 0.043 0.125 0.192

B: Satisfaction ¡0.088 0.112 ¡0.172 − 0.013
C: Size ¡0.065 0.094 ¡0.086 0.079
D: Leverage 0.117 ¡0.171 ¡0.072 ¡0.055
E: Tangibility 0.162 − 0.035 0.125 0.039
F: Cashflow 0.044 0.038 0.015 ¡0.249 − 0.046
G: Cash_S 0.018 0.081 0.609 ¡0.178 0.075
H: RoA_S 0.042 ¡0.078 ¡0.173 0.076 ¡0.156
I: Employees ¡0.071 ¡0.130 0.446 0.008 ¡0.116
J: Loss 0.123 ¡0.091 − 0.053 0.198 0.143
K: Age ¡0.076 0.054 0.025 ¡0.172 0.084

F G H I J K

A: Inv_Inefficiency − 0.003 0.004 0.102 − 0.027 0.182 ¡0.065

B: Satisfaction 0.054 0.143 ¡0.113 − 0.048 ¡0.112 0.083
C: Size 0.022 0.580 ¡0.290 0.709 ¡0.064 0.096
D: Leverage ¡0.277 ¡0.298 0.068 0.003 0.194 ¡0.181
E: Tangibility − 0.027 0.071 ¡0.152 0.026 0.037 0.206
F: Cashflow 0.038 − 0.015 0.114 ¡0.542 ¡0.124
G: Cash_S 0.021 ¡0.061 0.380 ¡0.054 0.177
H: RoA_S ¡0.088 0.042 ¡0.153 0.335 ¡0.215
I: Employees 0.089 0.353 − 0.036 ¡0.068 0.110
J: Loss ¡0.558 − 0.009 0.269 ¡0.059 ¡0.104
K: Age ¡0.097 0.027 ¡0.157 ¡0.104 ¡0.105

Note: Spearman (Pearson) correlations above (below) the diagonal. Bold font indicates significance at the 0.1 level. All variables are defined in Appendix A.

without (sufficient) employer ratings available regarding their invest­
ment efficiency.
5.3. Additional analyses
5.3.1. Differentiation between over- and underinvestment
In our main analysis, we consider the absolute values of deviations
from optimal investment levels, and show that job satisfaction has a
negative impact on this aggregate measure for investment inefficiency.
However, as discussed in our hypotheses development, investment in­
efficiency might result from one of two alternative scenarios (or both):
over- and underinvestment. While underinvestment issues in particular
arise from illiquidity problems due to restricted access to capital, over­
investment issues rather result from misjudgments and self-serving de­
cisions (e.g., empire building and short-termism) (e.g., Biddle et al.,
2009).
In this test, we explore which of the two scenarios dominates in our
setting by distinguishing between positive and negative deviations from
optimal investment levels. Positive residuals denote overinvestment,
while negative residuals reflect underinvestment problems. In Table 5,
we again estimate our main model (2), but this time separately for
positive and negative residuals. We have multiplied the negative re­
siduals by minus one to facilitate interpretation of the results.
We find negative estimates on our job satisfaction variable for both
regressions but only statistically significant at the 0.05 level (t = − 2.53)
for the underinvestment sample. For overinvestment, the estimate is not
statistically different from zero (t = − 0.81). Hence, our main results are
driven particular by employee satisfaction’s negative impact on under­
investment problems (i.e., in line with H2). This suggests that value-
destroying activities, such as empire building, by self-serving corpo­
rate decision-makers who take advantage of information asymmetries
between themselves and the owners of a firm, are not the dominant

8
S. Arvidsson et al. European Management Journal xxx (xxxx) xxx

Table 4 Kununu dimensions separately.

Main results. We report the corresponding results in Table 6. Besides showing the
Dep. Variable: Inv_Inefficiency Coefficient t-statistics results for our overall investment inefficiency measure, we specifically
differentiate between over- and underinvestment scenarios. We find no
Satisfaction − 0.004* − 1.88
Size − 0.004** − 2.45 statistically significant estimates for Over_Invest, which again shows that
Leverage 0.024*** 3.89 underinvestment problems play a dominant role within the overall effect
Tangibility 0.027*** 3.16 of job satisfaction on investment activities using our setting. For
Cashflow 0.102*** 3.32 Under_Invest, 11 out of the 13 individual dimensions have a significantly
Cash_S 0.000** 2.49
RoA_S 0.001 0.02
negative impact. Hence, there is no specific job satisfaction dimension
Employees − 0.001** − 2.50 that is particularly important for mitigating problems related to moral
Loss 0.016*** 3.40 hazard and adverse selection. Instead, it is seemingly an interplay of
Age − 0.001 − 0.70 various dimensions that leads to positive job satisfaction and ultimately
IMR − 0.008 − 1.00
mitigates problems related to moral hazard and adverse selection. This is
Year-Fixed Effects Included
Industry-Fixed Effects Included also in line with the definition that job satisfaction comprises a variety of
N 1006 factors (Coff, 1997; Bayarcelik & Afacan Findikli, 2016).
Mean VIF 1.89 Social responsibility, as one of the few exceptions, has no significant
F-statistic 4.88*** bearing on underinvestment. According to Bowen (1953, p. 6), CSR
R2 0.091
Adj. R2 0.073
refers to managers’ responsibilities to make decisions that are desirable
in terms of the objectives and values of society. In line with this defi­
Note: t-statistics are robust and clustered at firm level. ***, **, and * indicate nition, social responsibility activities are found to be significantly
two-sided significance at the 0.01, 0.05, and 0.1 levels, respectively. All vari­
determined by the personal ethical values of individual top executives
ables are defined in Appendix A.
(e.g., Hemingway & Maclagan, 2004).11 Hence, lower employee satis­
faction regarding firms’ CSR activities as measured by our employer
Table 5
reviews might in particular indicate that managers of such firms behave
Over-vs. Underinvestment. less ethically, which is for instance supported by the empirical findings
of Kim et al. (2012) who report that CSR is negatively associated with
Dep. Variable: Over_Invest Dep. Variable: Under_Invest
opportunistic earnings management. With regard to investment de­
Coefficient t-statistics Coefficient t-statistics cisions, the corresponding problems of moral hazard and managerial
Satisfaction − 0.004 − 0.81 − 0.005** − 2.53 opportunism are discussed particularly in the context of greater empire
Size − 0.006 − 1.56 − 0.004*** − 2.71 building and thus overinvestment. Specifically, Gul et al. (2020)
Leverage 0.026** 2.13 0.019*** 3.43
demonstrate empirically that CSR is negatively associated with empire
Tangibility 0.033** 2.13 0.014* 1.85
Cashflow 0.140** 2.43 0.078** 2.28
building, but it seemingly does not have an impact on
Cash_S 0.000** 2.38 0.000** 2.10 underinvestment.12
RoA_S − 0.036 − 0.77 0.035 0.95 We find the strongest influence on underinvestment problems stem
Employees − 0.001*** − 2.63 − 0.000** − 2.23 from: working climate, interesting work, communication, gender
Loss 0.018** 1.99 0.016*** 3.10
equality, compensation, and a firm’s perceived image. This perceived
Age 0.000 0.05 − 0.002 − 1.25
IMR − 0.009 − 0.65 − 0.001 − 0.08 image presumably reflects a firm’s external reputation, which might
Year-FE Included Included ease access to external capital and thereby easing underinvestment
Industry-FE Included Included problems (e.g., Cao et al., 2015). Moreover, gender equality is nowadays
N 438 568 a topic of high public interest and also important for capital providers (e.
Adj. R2 0.061 0.108
g., Pandey et al., 2020). As explained in our hypotheses development,
Note: t-statistics are robust and clustered at firm level. ***, **, and * indicate particularly in the case of debt contracting, private communication does
two-sided significance at the 0.01, 0.05, and 0.1 levels, respectively. All vari­ play an important role in reducing information asymmetries (e.g., Cas­
ables are defined in Appendix A. cino et al., 2014; Chen, 2016), which is why it is reasonable to argue that
the communication dimension is strongly negatively correlated with
channel in our setting. This might be due to our consideration of private underinvestment. The strong impact of compensation and interesting
firms, in which managers’ moral hazard is generally expected to play a work is also in accordance with our discussion that job satisfaction re­
less pronounced role due to the ownership structure (Bargeron et al., lates to more motivated employees who are more likely to act in the best
2015; Gao et al., 2013). interests of the firm (i.e., less moral hazard problems). Fair compensa­
Instead, reduced information asymmetries with capital providers and tion schemes are identified especially as being key drivers of employee
lower financing constraints for firms with high job satisfaction levels motivation and performance (both for management and regular staff) (e.
seem to be the underlying driver of a positive association between job g., Banker et al., 2000; Jensen & Zimmerman, 1985). Furthermore,
satisfaction and investment efficiency, because this prevents liquidity Kanagaretnam and Sarkar (2011) have shown that appropriate mana­
shortfalls that might lead to firms’ eschewing of profitable investment gerial compensation schemes may reduce incentives not to invest in
opportunities. This is also in line with previous evidence that job satis­ profitable projects (i.e., underinvestment). Finally, the individual cate­
faction is negatively associated with the cost of corporate borrowing gory working climate can be considered as one of the broadest di­
(Chi & Chen, 2021). mensions, which is why it is not surprising that it has a particularly

5.3.2. Differentiation between individual job satisfaction dimensions

A huge advantage of our job satisfaction variable based on employer
reviews from the online rating website Kununu is that we cannot only
use a composite measure on the general level of job satisfaction, but the
detailed reviews also allow to distinguish between various sub-
dimensions of job satisfaction. Accordingly, to increase our under­
standing of the association between job satisfaction and investment ef­
ficiency, we re-run our regression model (2) for each of the 13 individual
11
While CSR is naturally closely related to employee satisfaction since respect
for employees is considered to be a key part of CSR in most definition ap­
proaches (Dahlsrud, 2008), they are not identical constructs (e.g., Wisse et al.,
2018).
12
In line with this consideration, CSR has the highest coefficient (in absolute
terms) for the model with Over Invest as the dependent variable, albeit being
statistically insignificant (as all other individual satisfaction items).

9
S. Arvidsson et al. European Management Journal xxx (xxxx) xxx

Table 6
Individual cultural dimensions.
(1) Work_Climate (2) Management_ Behavior (3) Teamwork (4) Interesting_Work (5) Communication

Inv_Inefficiency − 0.004* (− 1.98) − 0.002 (− 1.24) − 0.001 (− 0.47) − 0.004* (− 1.95) − 0.003 (− 1.50)
Over_Invest − 0.004 (− 0.83) − 0.004 (− 0.95) 0.000 (0.00) − 0.005 (− 1.19) − 0.002 (− 0.53)
Under_Invest − 0.005*** (− 2.88) − 0.003** (− 2.00) − 0.004* (− 1.72) − 0.005** (− 2.61) − 0.005** (− 2.44)
Year-FE Included Included Included Included Included
Industry-FE Included Included Included Included Included
Controls Included Included Included Included Included
Adj. R2 0.073/0.061/0.111 0.070/0.062/0.103 0.069/0.059/0.102 0.073/0.062/0.108 0.071/0.060/0.108

(6) Gender_Equality (7) Older_People (8) Career_Opportunities (9) Fair_Compensation (10) Work_Environment

Inv_Inefficiency − 0.003 (− 1.56) − 0.002 (− 1.11) − 0.004** (− 2.05) − 0.002 (− 1.25) − 0.002 (− 0.91)
Over_Invest − 0.004 (− 0.84) − 0.002 (− 0.30) − 0.005 (− 1.11) 0.002 (0.50) − 0.003 (− 0.59)
Under_Invest − 0.005*** (− 2.75) − 0.003* (− 1.88) − 0.004** (− 2.39) − 0.005** (− 2.54) − 0.002 (− 1.21)
Year -FE Included Included Included Included Included
Industry-FE Included Included Included Included Included
Controls Included Included Included Included Included
Adj. R2 0.072/0.061/0.110 0.070/0.060/0.103 0.073/0.062/0.108 0.071/0.060/0.112 0.070/0.060/0.100

(11) Eco_Social_ (12) Work_Life (13) Image

Responsibility

Inv_Inefficiency − 0.003 (− 1.59) − 0.003* (− 1.71) − 0.003** (− 1.97)

Over_Invest − 0.005 (− 1.31) − 0.003 (− 0.55) − 0.004 (− 0.96)
Under_Invest − 0.003 (− 1.32) − 0.003* (− 1.92) − 0.004** (− 2.52)
Year -FE Included Included Included
Industry-FE Included Included Included
Controls Included Included Included
Adj. R2 0.072/0.063/0.101 0.072/0.060/0.104 0.073/0.062/0.107

Note: t-statistics are robust and clustered at firm level. ***, **, and * indicate two-sided significance at the 0.01, 0.05, and 0.1 levels, respectively. All variables are
defined in Appendix A.

strong impact when considering the role of job satisfaction. In its online
guidance to users undertaking an employer review, Kununu mentions
that this dimension is supposed to measure whether there is a general
climate of fairness and mutual trust, which are key characteristics for
low agency conflicts within a firm and pro-organizational behavior by
all members of a firm (e.g., Brown, Gray, McHardy, & Taylor, 2015).
5.3.3. Sensitivity tests
Table 7 reports several additional tests to ensure the robustness of
our findings. Initially, we follow Chen et al. (2011) and slightly modify
our investment model (1) in order to estimate any deviations from
‘normal’ investment levels. More precisely, in the alternative model (3),
we take into account for differential predictability for sales increases and
decreases by adding a dummy variable coded one if sales have decreased
in the previous year in our investment model (Negi,t− 1 ). Prior literature
argues that the relationship between investment and sales growth might
differ for increases and decreases (e.g., Chen et al., 2011; McNichols &
Stubben, 2008). Under this assumption, the following model should lead
to a more precise prediction of ‘normal’ investment levels and therefore
also for our variable of interest Inv_Inefficiency:
Investmenti,t = α0 + α1 Negi,t− 1 + α2 Sales Growthi,t− 1
(3)
+ α3 Negi,t− 1 *Sales Growthi,t− 1 + εi,t
Next, we apply different modifications to our job satisfaction mea­
sure to check that our results are robust. For instance, we test whether or
not our results hold when we exclude reviews from former employees
from the computation of our job satisfaction measure, because they
might be more negative than reviews from current employees.
Furthermore, we omit reviews from non-regular employees such as
trainees, interns, and other temporary workers. Regarding the remain­
ing reviews, we then additionally differentiate between regular staff and
executives. Finally, in the calculation of our job satisfaction measure for
the main analyses, we require at least three reviews per firm. In our last
additional tests, we check whether or not our conclusions hold if we
increase this minimum number to 5, 10, and 15 reviews.
The results in Table 7 show that our main inferences remain robust
despite these alterations. For some tests (only regular staff, only
executives, and minimum 10 and 15 reviews), the effect of job satis­
faction on investment efficiency becomes slightly insignificant for the
overall investment inefficiency measure. However, we still find signifi­
cant effects from job satisfaction on underinvestment problems. The sole
exception is our test where only executive reviews are considered, for
which the coefficient is slightly insignificant (t = − 1.61; p-value =
0.11). Accordingly, this result supports the contention that, while in­
vestment decisions are generally made at the executive level (e.g.,
Reichelstein, 1997), it is not necessarily only job satisfaction among
firms’ top executives that can affect corporate investment efficiency.13
This is in line with our hypothesis development that job satisfaction
might also affect underinvestment because moral hazard problems
related to regular staff are reduced. Based on human resource theory,
employees who experience greater job satisfaction should be more
motivated to contribute to the firm’s success (e.g., Huang et al., 2015;
Maslow, 1943), which is in turn a key factor in promoting access to
outside capital (e.g., Adams et al., 2003; Jiang, 2008).
In our final robustness test, we address concerns that firms with
positive employee reviews might be systematically different from firms
with more negative reviews (e.g., Huang et al., 2017). For instance,
literature suggests that satisfaction among employees is particularly low
in financially distressed firms (e.g., Arampatzi et al., 2015). Logically,
these firms should also be more likely to suffer from underinvestment
issues, given that access to capital is limited for financially distressed
clients due to both their higher credit risk for capital providers and
greater likelihood of violating debt covenants (e.g., Habib et al., 2020).
Based on this argumentation, one might have concerns that our findings
capture an effect that is not only driven by job satisfaction but other
issues such as financial distress. Accordingly, although we consider a
variety of control variables in our main model, the results of our full
13
It is important to note that this result might also be driven by a significant
drop in observations because there are less reviews available from executives.
We have 506 observations for the regular staff analysis but only 246 for the
executives’ analysis because only around 15% of the reviews hand collected
from kununu.com are from executives. Naturally, t-values decrease with a
lower number of observations.

10
S. Arvidsson et al. European Management Journal xxx (xxxx) xxx

Table 7
Additional tests.
(1) Alternative Investment (2) Exclude Reviews from Former (3) Exclude Interns/Trainees and Temporary Workers (i.e., (4) Only Reviews by
Inefficiency Measure Employees Only Reviews by Regular Staff and Executives) Regular Staff

Inv_Inefficiency − 0.005** (− 2.13) − 0.005* (− 1.86) − 0.003* (− 1.69) − 0.003 (− 1.21)

Over_Invest − 0.005 (− 0.93) − 0.002 (− 0.43) − 0.001 (− 0.22) 0.001 (0.20)
Under_Invest − 0.005** (− 2.46) − 0.006*** (− 2.85) − 0.005*** (− 2.72) − 0.005** (− 2.56)
Year -FE Included Included Included Included
Industry-FE Included Included Included Included
Controls Included Included Included Included
N 1006/427/579 892/394/498 953/417/536 903/397/506
Adj. R2 0.065/0.057/0.081 0.049/0.035/0.108 0.064/0.052/0.105 0.059/0.043/0.101

(5) Only Reviews by (6) Minimum 5 Reviews Per Firm (7) Minimum 10 Reviews (8) Minimum 15
Executives (Instead of 3 as in Main Test) Reviews

Inv_Inefficiency − 0.003 (− 1.20) − 0.004* (− 1.70) − 0.004 (− 1.41) − 0.006 (− 1.45)

Over_Invest − 0.002 (− 0.28) − 0.004 (− 0.70) − 0.002 (− 0.26) 0.001 (0.10)
Under_Invest − 0.004 (− 1.61) − 0.005** (− 2.17) − 0.006*** (− 2.68) − 0.008** (− 2.36)
Year -FE Included Included Included Included
Industry-FE Included Included Included Included
Controls Included Included Included Included
N 447/201/246 887/388/499 696/315/381 526/234/292
Adj. R2 0.062/0.037/0.077 0.057/0.034/0.101 0.054//0.009/0.116 0.054/0.006/0.123

Note: t-statistics are robust and clustered at firm level. ***, **, and * indicate two-sided significance at the 0.01, 0.05, and 0.1 levels, respectively. All variables are
defined in Appendix A.

Table 8
Propensity score matching.
Panel A: First-Stage Probit Model

Dep. Variable: High_Rating Coefficient z-statistics

Size 0.266** 4.29
Leverage − 0.610*** − 2.64
Tangibility − 0.613** − 2.59
Cashflow − 0.540 − 0.68
Cash_S 0.016*** 3.24
RoA_S − 2.689** − 2.09
Employees − 0.209*** − 6.77
Loss − 0.426*** − 2.87
Age − 0.027 − 0.45
IMR − 0.631* − 1.69
Year-Fixed Effects Included
Industry-Fixed Effects Included
Wald χ2 30.43***
N 1006
Pseudo R2 0.104
Area under ROC Curve 0.70

Panel B: Matching Analysis

Matched Sample (n = 666) Full (Unmatched) Sample (n = 1006)

Mean | Mean | Difference Mean | Mean | Difference

High_Rating = 1 High_Rating = 0 High_Rating = 1 High_Rating = 0

Size 11.526 11.515 0.011 11.748 11.538 0.210***

Leverage 0.404 0.398 0.006 0.377 0.431 − 0.054***
Tangibility 0.194 0.186 0.008 0.193 0.194 − 0.001
Cashflow 0.092 0.098 − 0.006 0.094 0.091 0.003
Cash_S 6.205 4.581 1.624** 8.455 6.903 1.552*
RoA_S 0.035 0.034 0.001 0.032 0.042 − 0.010***
Employees 1.359 1.336 0.023 1.367 2.929 − 1.562***
Loss 0.162 0.108 0.054** 0.125 0.212 − 0.087***
Age 3.820 3.802 0.018 3.805 3.759 0.046
IMR 0.221 0.216 0.005 0.200 0.228 − 0.028***

Panel C: Main Regressions for Matched Sample

Dep. Variable: Inv_Inefficiency Dep. Variable: Over_Invest Dep. Variable: Under_Invest

Coefficient t-statistics Coefficient t-statistics Coefficient t-statistics

Satisfaction − 0.004 − 1.61 − 0.002 − 0.42 − 0.005** − 2.19

Controls Included Included Included
Year-FE Included Included Included
Industry-FE Included Included Included
N 666 287 379
Adj. R2 0.075 0.081 0.101

Note: t-statistics are robust and clustered at firm level. ***, **, and * indicate two-sided significance at the 0.01, 0.05, and 0.1 levels, respectively. All variables are
defined in Appendix A.

11
S. Arvidsson et al. European Management Journal xxx (xxxx) xxx

sample might be biased because including control variables does not
necessarily adequately control for the covariates affecting
employee-perceived job satisfaction (Huang et al., 2017).
For this reason, we use a median split for our job satisfaction measure
and apply propensity score matching to a probit model predicting
whether a company has a high satisfaction (High_Rating = 1) or not, with
caliper = 0.01, nearest neighbor option, and no replacements. In Panel A
of Table 8, we report the first stage profit model. The ROC (0.70) sug­
gests that our model fits the data quite well. As a result of our strict
matching criteria, our matched sample only covers 666 firm years (i.e.,
our sample reduces by almost one third), but the comparison of the
mean values for our controls in Panel B documents that our matching
procedure is successful. While we find large differences between high
and low satisfaction firms in our full (i.e., unmatched) sample, with
seven out of ten differences also being statistically significant, the dif­
ferences are lower for our matched sample and we find only two sta­
tistically significant differences here.
In Panel C, we re-estimate our main regression models for our
matched sample. For the aggregate investment efficiency score, we find
a slightly insignificant estimate (p = 0.11), but the effect of job satis­
faction on underinvestment remains negative and significant also for
this matched sample, which facilitates concerns that our results are
driven by other factors than job satisfaction.
In summary, these tests show that job satisfaction has a significant
and robust impact on investment efficiency, particularly by reducing
underinvestment problems in our private firm setting.
6. Conclusion
In this study, we investigate the relationship between job satisfaction
and investment efficiency. Using a relatively novel measure for job
satisfaction based on crowdsourced employer reviews and a sample of
German private firms, we find that job satisfaction is positively associ­
ated with investment efficiency. This is in accordance with our hy­
potheses that a high job satisfaction should mitigate adverse selection
and moral hazard resulting from information asymmetries, which ulti­
mately leads to higher investment efficiency. Additional analyses reveal
that job satisfaction affects investment efficiency particularly in its
reduction of underinvestment problems. Hence, a positive work envi­
ronment with motivated and content employees seemingly prevents
liquidity shortfalls that might induce firms to eschew profitable invest­
ment projects that they would otherwise undertake. The effect of job
satisfaction on overinvestment is insignificant, indicating that reduced
empire building motives from managers does not play an important role
in our setting.
We acknowledge that our study is subject to some limitations. As our
sample consists of German private firms only, our results may not be
applicable to settings in other countries or the public firm setting, which
differ significantly from that of private firms (e.g., Chen et al., 2011).
Furthermore, because we consider only group accounts, our sample
represents larger private firms in Germany. Finally, since we needed to
hand-collect data for our job satisfaction measure, which is not available
for all private firms, our sample size is rather small.
Despite these limitations, we are aware of no other studies that
examine the effect of job satisfaction on investment efficiency. By
considering the private firm setting, we further contribute to the rather
scarce literature on corporate actions by private firms. Our findings
should therefore have important implications for both researchers and
practitioners. We show specifically that job satisfaction does matter for
the performance of private firms. Hence, private firms should also be
actively engaged in cultivating a positive work environment with a high
degree of employee satisfaction. However, our study still leaves room for
future research in this important area. For instance, the question re­
mains whether job satisfaction also has a significant impact on the in­
vestment efficiency of publicly listed companies, which are much more
subject to external scrutiny and regulation.
Declaration of competing interest
None.

Appendix A. Variable Definitions

Variable Definition

Inv_Inefficiency Investment inefficiency, measured as the residuals (absolute values) from a simple investment regression model that predicts the level of
investment based on growth opportunities (e.g., Gomariz and Ballesta, Journal of Banking and Finance, 2014; Benlemlih and Bitar, Journal of
Business Ethics, 2018):
Investmenti,t = α0 + ∝α1 Sales Growthi,t− 1 + εi,t
Investment is defined as the net increase in tangible and intangible assets, scaled by lagged total assets. Sales_Growth is the rate of change in sales
between t-2 and t-1. The model is estimated cross-sectionally for each industry year.
The alternative investment inefficiency measure employed in one of the additional test uses a slightly adjusted investment model where we
differentiate between positive and negative sales changes (Chen et al., The Accounting Review, 2011):
Investmenti,t = α0 + α1 Negi,t− 1 + α2 Sales Growthi,t− 1 + α3 Negi,t− 1 *Sales Growthi,t− 1 + εi,t
Over_Invest Level of overinvestment, measured as the positive residuals from the estimating the investment model.
Under_Invest Level of underinvestment, measured as the negative residuals from estimating the investment model, multiplied by − 1.
Satisfaction Job satisfaction calculated as the mean across all Kununu reviews (average of 13 individual items) for each firm.
Employee_Assessment_Indicator Indicator variable coded 1 if a firm has at least three reviews available on Kununu, zero otherwise.
Ind_Employee_Assessment_Indicator Industry average of Employee_Assessment_Indicator.
Size Natural logarithm of total assets.
Leverage Ratio of total liabilities to total assets.
Tangibility Ratio of tangible assets to total assets.
Cashflow Ratio of cashflow to total assets.
Cash_S Firm-level standard deviation of cash and cash equivalents.
RoA_S Firm-level standard deviation of return on assets.
Employees Number of employees divided by 1000.
Loss Indicator variable coded 1 if firms report a negative net income, zero otherwise.
Age Natural logarithm of firm age in years.
High_Rating Indicator variable coded 1 if a firm’s satisfaction score exceeds the sample median, zero otherwise.

12
S. Arvidsson et al. European Management Journal xxx (xxxx) xxx

Appendix B. Heckman Correction for Sample Selection – First-Stage Selection Model

Dep. Variable: Employee_Assessment_Indicator Coefficient z-statistics

Ind_Employee_Assessment_Indicator 2.772*** 3.84

Size 0.082 0.55
Leverage − 0.463 − 0.91
Tangibility − 0.111 − 0.24
Cashflow − 1.986 − 1.41
Cash_S − 0.004 − 0.23
RoA_S − 3.958* − 1.70
Employees 0.403** 2.20
Loss 0.013 0.06
Age − 0.161 − 1.14
Year-Fixed Effects Included
Industry-Fixed Effects Included
N 1810
Wald χ2 54.18***
Pseudo R2 0.17
Area under ROC Curve 0.77
Note: z-statistics are robust and clustered at firm level. ***, **, and * indicate two-sided significance
at the 0.01, 0.05, and 0.1 levels, respectively. All variables are defined in Appendix A.

References Burkart, M., Panunzi, F., & Shleifer, A. (2003). Family firms. The Journal of Finance, 58
(5), 2167–2201. https://doi.org/10.1111/1540-6261.00601
Campbell, D., & Shang, R. (2022). Tone at the bottom: Measuring corporate misconduct
Adams, M., Burton, B., & Hardwick, P. (2003). The determinants of credit ratings in the
risk from the text of employee reviews. Management Science, 68(9), 7043–7053.
United Kingdom insurance industry. Journal of Business Finance & Accounting, 30
https://doi.org/10.1287/mnsc.2021.4211
(3–4), 539–572. https://doi.org/10.1111/1468-5957.00007
Cao, Y., Myers, J. N., Myers, L. A., & Omer, T. C. (2015). Company reputation and the
Ağca, Ş., & Mozumdar, A. (2008). The impact of capital market imperfections on
cost of equity capital. Review of Accounting Studies, 20, 42–81. https://doi.org/
investment–cash flow sensitivity. Journal of Banking & Finance, 32(2), 207–216.
10.1007/s11142-014-9292-9
https://doi.org/10.1016/j.jbankfin.2007.02.013
Cascino, S., Clatworthy, M., Garcia Osma, B., Gassen, J., Iman, S., & Jeanjean, T. (2014).
Alchian, A. A., & Woodward, S. (1988). Review: The firm is dead; long live the firm a
Who uses financial reports and for hat purpose? Evidence from capital providers.
review of Oliver E. Williamson’s the economic institutions of capitalism. Journal of
Accounting in Europe, 11(2), 185–209. https://doi.org/10.1080/
Economic Literature, 26, 65–79.
17449480.2014.940355
Arampatzi, E., Burger, M. J., & Veenhoven, R. (2015). Financial distress and happiness of
Chen, P.-C. (2016). Banks’ acquisition of private information about financial
employees in times of economic crisis. Applied Economics Letters, 3, 173–179. https://
misreporting. The Accounting Review, 91(3), 835–857. https://doi.org/10.2308/accr-
doi.org/10.1080/13504851.2014.931916
51222
Audretsch, D. B., & Elston, J. A. (1997). Financing the German Mittelstand. Small Business
Chen, F., Hope, O.-K., Li, Q., & Wang, X. (2011). Financial reporting quality and
Economics, 9(1), 97–110. https://doi.org/10.1023/A:1007963621438
investment efficiency of private firms in emerging markets. The Accounting Review,
Baddeley, M. (2017). Keynes’ psychology and behavioural macroeconomics: Theory and
86(4), 1255–1288. https://doi.org/10.2308/accr-10040
policy. Economic and Labour Relations Review, 28(2), 177–196. https://doi.org/
Chen, H.-L., & Huang, Y.-S. (2006). Employee stock ownership and corporate R&D
10.1177/1035304617706849
expenditures: Evidence from Taiwan’s information-technology industry. Asia Pacific
Badertscher, B., Shroff, N., & White, H. D. (2013). Externalities of public firm presence:
Journal of Management, 23, 369–384. https://doi.org/10.1007/s10490-006-9005-4
Evidence from private firms’ investment decisions. Journal of Financial Economics,
Chen, C. X., Lu, H., & Sougiannis, T. (2012). The agency problem, corporate governance,
109(3), 682–706. https://doi.org/10.1016/j.jfineco.2013.03.012
and the asymmetrical behavior of selling, general, and administrative costs.
Bae, G. S., Choi, S. U., Dhaliwal, D. S., & Lamoreaux, P. T. (2017). Auditors and client
Contemporary Accounting Research, 29(1), 252–282. https://doi.org/10.1111/j.1911-
investment efficiency. The Accounting Review, 92(2), 19–40. https://doi.org/
3846.2011.01094.x
10.2308/accr-51530
Chi, W., & Chen, Y. (2021). Employee satisfaction and the cost of corporate borrowing.
Banker, R. D., Lee, S.-Y., Potter, G., & Srinivasan, D. (2000). An empirical analysis of
Finance Research Letters, 40, Article 101666. https://doi.org/10.1016/j.
continuing improvements following the implementation of a performance-based
frl.2020.101666
compensation plan. Journal of Accounting and Economics, 30(3), 315–350. https://
Chung, R., Firth, M., & Kim, J.-B. (2002). Institutional monitoring and opportunistic
doi.org/10.1016/S0165-4101(01)00016-7
earnings management. Journal of Corporate Finance, 8(1), 29–48. https://doi.org/
Bargeron, L., Lehn, K., & Smith, J. (2015). Employee–management trust and M&A
10.1016/S0929-1199(01)00039-6
activity. Journal of Corporate Finance, 35, 389–406. https://doi.org/10.1016/j.
Coff, R. W. (1997). Human assets and management dilemmas: Coping with hazards on
jcorpfin.2015.07.012
the road to resource-based theory. Academy of Management Review, 22(2), 374–402.
Bassemir, M. (2018). Why do private firms adopt IFRS? Accounting and Business Research,
https://doi.org/10.5465/amr.1997.9707154063
48(3), 237–263. https://doi.org/10.1080/00014788.2017.1357459
Cook, K. A., Romi, A. M., Sánchez, D., & Sánchez, J. M. (2019). The influence of
Bayarcelik, E. B., & Afacan Findikli, M. (2016). The mediating effect of job satisfaction on
corporate social responsibility on investment efficiency and innovation. Journal of
the relation between organizational justice perception and intention to leave.
Business Finance & Accounting, 46, 494–537. https://doi.org/10.1111/jbfa.12360
Procedia – Social and Behavioral Science, 235, 403–411. https://doi.org/10.1016/j.
Dahlsrud, A. (2008). How corporate social responsibility is defined: An analysis of 37
sbspro.2016.11.050
definitions. Corporate Social Responsibility and Environmental Management, 15(1),
Bendel, D., Demary, M., & Voigtländer, M. (2016). Entwicklung der
1–13. https://doi.org/10.1002/csr.132
Unternehmensfinanzierung in Deutschland. Vierteljahresschrift zur empirischen
Durand, R., & Vargas, V. (2003). Ownership, organization, and private firms’ efficient
Wirtschaftsforschung, 43, 37–54.
use of resources. Strategic Management Journal, 24(7), 667–675. https://doi.org/
Benlemlih, M., & Bitar, M. (2018). Corporate social responsibility and investment
10.1002/smj.321
efficiency. Journal of Business Ethics, 148, 647–671. https://doi.org/10.1007/
Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction
s10551-016-3020-2
and equity prices. Journal of Financial Economics, 101(3), 621–640. https://doi.org/
Bertrand, M., & Mullainathan, S. (2003). Enjoying the quiet life? Corporate governance
10.1016/j.jfineco.2011.03.021
and managerial preferences. Journal of Political Economy, 111(5), 1043–1075.
Edmans, A. (2012). The link between job satisfaction and firm value, with implications
https://doi.org/10.1086/376950
for corporate social responsibility. Academy of Management Perspectives, 26(4), 1–19.
Biddle, G. C., & Hilary, G. (2006). Accounting quality and firm-level capital investment.
https://doi.org/10.5465/amp.2012.0046
The Accounting Review, 81(5), 963–982. https://doi.org/10.2308/
Eisdorfer, A., Giaccotto, C., & White, R. (2013). Capital structure, executive
accr.2006.81.5.963
compensation, and investment efficiency. Journal of Banking & Finance, 37(2),
Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality
549–562. https://doi.org/10.1016/j.jbankfin.2012.09.011
relate to investment efficiency? Journal of Accounting and Economics, 48(2–3),
Fama, E. F. (1985). What’s different about banks? Journal of Monetary Economics, 15(1),
112–131. https://doi.org/10.1016/j.jacceco.2009.09.001
29–39. https://doi.org/10.1016/0304-3932(85)90051-0
Bowen, H. R. (1953). Social responsibilities of the businessmen. New York, NY: Harper &
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of
Row.
Law and Economics, 26, 301–325. https://doi.org/10.1086/467037
Brown, S., Gray, D., McHardy, J., & Taylor, K. (2015). Employee trust and workplace
performance. Journal of Economic Behavior & Organization, 116, 361–378. https://
doi.org/10.1016/j.jebo.2015.05.001

13
S. Arvidsson et al.
Fauver, L., McDonald, M. B., & Taboada, A. G. (2018). Does it pay to treat employees
well? International evidence on the value of employee-friendly culture. Journal of
Corporate Finance, 50, 84–108. https://doi.org/10.1016/j.jcorpfin.2018.02.003
Federation of European Accountants. (2016). Pursuing a strategic debate: The future of
audit and assurance. Brussels: FEE. Discussion Paper.
Flammer, C., & Luo, J. (2017). Corporate social responsibility as an employee
governance tool: Evidence from a quasi-experiment. Strategic Management Journal,
38(2), 163–183. https://doi.org/10.1002/smj.2492
Gan, H. (2019). Does CEO managerial ability matter? Evidence from corporate
investment efficiency. Review of Quantitative Finance and Accounting, 52, 1085–1118.
https://doi.org/10.1007/s11156-018-0737-2
Gao, H., Harford, J., & Li, K. (2013). Determinants of corporate cash policy: Insights from
Private firms. Journal of Financial Economics, 109, 623–639. https://doi.org/
10.1016/j.jfineco.2013.04.008
Gao, R., & Yu, X. (2020). How to measure capital investment efficiency: A literature
synthesis. Accounting and Finance, 60, 299–334. https://doi.org/10.1111/acfi.12343
García Lara, J. M., Osma, B. G., & Penalva, F. (2016). Accounting conservatism and firm
investment efficiency. Journal of Accounting and Economics, 61(1), 221–238. https://
doi.org/10.1016/j.jacceco.2015.07.003
Gârleanu, N., & Zwiebel, J. (2009). Design and renegotiation of debt covenants. Review of
Financial Studies, 22(2), 749–781. https://doi.org/10.1093/rfs/hhn017
Gomariz, M. F. C., & Ballesta, J. P. S. (2014). Financial reporting quality, debt maturity
and investment efficiency. Journal of Banking & Finance, 40, 494–506. https://doi.
org/10.1016/j.jbankfin.2013.07.013
Gordon, M. J. (1992). The Neoclassical and a post Keynesian theory of investment.
Journal of Post Keynesian Economics, 14, 425–443. https://doi.org/10.1080/
01603477.1992.11489909
Graham, J. R., Grennan, J., Harvey, C. R., & Rajgopal, S. (2018). Corporate culture: The
interview evidence. In Working paper. Duke University.
Guiso, L., Sapienza, P., & Zingales, L. (2015). The value of corporate culture. Journal of
Financial Economics, 60–76. https://doi.org/10.1016/j.jfineco.2014.05.010
Gul, F. A., Krishnamurti, C., Shams, S., & Chowdhury, H. (2020). Corporate social
responsibility, overconfident CEOs and empire building: Agency and stakeholder
theoretic perspectives. Journal of Business Research, 111, 52–68. https://doi.org/
10.1016/j.jbusres.2020.01.035
Habib, A., D’ Costa, M., Huang, H. J., Bhuiyan, B. U., & Sun, L. (2020). Determinants and
consequences of financial distress: Review of the empirical literature. Accounting and
Finance, 60, 1023–1075. https://doi.org/10.1111/acfi.12400
Habib, A., Ranasinghe, D., & Huang, H. J. (2018). A literature survey of financial
reporting in private firms. Research in Accounting Regulation, 30(1), 31–37. https://
doi.org/10.1016/j.racreg.2018.03.005
Hayashi, F. (1982). Tobin’s marginal q and average q: A neoclassical interpretation.
Econometrica, 50(1), 213–224. https://doi.org/10.2307/1912538
Hemingway, C. A., & Maclagan, P. W. (2004). Managers’ personal values as drivers of
corporate social responsibility. Journal of Business Ethics, 50, 33–44. https://doi.org/
10.1023/B:BUSI.0000020964.80208.c9
Herda, D. N., & Lavelle, J. J. (2015). Client identification and client commitment in a
privately held client setting: Unique constructs with opposite effects on auditor
objectivity. Accounting Horizons, 29(3), 577–601. https://doi.org/10.2308/acch-
51091
Hess, M. F., & Broughton, E. (2014). Fostering an ethical organization from the bottom
up and the outside in. Business Horizons, 57(4), 541–549. https://doi.org/10.1016/j.
bushor.2014.02.004
Hill, R. P., & Rapp, J. M. (2014). Codes of ethical conduct: A bottom-up approach.
Journal of Business Ethics, 123, 621–630. https://doi.org/10.1007/s10551-013-2013-
7 https://doi.org/10.1111/j.1744-6570.1995.tb01781.x
Hope, O.-K., Langli, J. C., & Thomas, W. B. (2012). Agency conflicts and auditing in
private firms. Accounting, Organizations and Society, 37(7), 500–517. https://doi.org/
10.1016/j.aos.2012.06.002
Hope, O.-K., Li, C., Lin, A.-P., & Rabier, M. (2021). Happy analysts. Accounting,
Organizations and Society, 90, Article 101199. https://doi.org/10.1016/j.
aos.2020.101199
Hope, O.-K., & Thomas, W. B. (2008). Managerial empire building and firm disclosure.
Journal of Accounting Research, 46(3), 591–626. https://doi.org/10.1111/j.1475-
679X.2008.00289.x
Hope, O.-K., Thomas, W., & Vyas, D. (2011). Financial credibility, ownership, and
financing constraints in private firms. Journal of International Business Studies, 42,
935–957. https://doi.org/10.1057/jibs.2011.23
Hosmer, D. W., & Lemeshow, S. (2000). Applied logistic regression (2nd ed.). Hoboken, NJ:
John Wiley & Sons, Inc.
Huang, M., Li, P., Meschke, F., & Guthrie, J. P. (2015). Family firms, employee
satisfaction, and corporate performance. Journal of Corporate Finance, 34, 108–127.
https://doi.org/10.1016/j.jcorpfin.2015.08.002
Huang, M., Masli, A., Meschke, F., & Guthrie, J. P. (2017). Clients’ workplace
environment and corporate audits. Auditing: A Journal of Practice & Theory, 36(4),
89–113. https://doi.org/10.2308/ajpt-51691
Hubbard, R. G. (1998). Capital-market imperfections and investment. Journal of
Economic Literature, 36(1), 193–225.
Hui, K. W., & Matsunga, S. R. (2015). Are CEOs and CFOs rewarded for disclosure
quality? The Accounting Review, 90(3), 1013–1047. https://doi.org/10.2308/accr-
50885
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers.
The American Economic Review, 76(3), 323–329.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior,
agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
https://doi.org/10.1016/0304-405X(76)90026-X
14
European Management Journal xxx (xxxx) xxx
Jensen, M. C., & Zimmerman, J. L. (1985). Management compensation and the
managerial labor market. Journal of Accounting and Economics, 7(1–3), 3–9. https://
doi.org/10.1016/0165-4101(85)90025-4
Jiang, J. (2008). Beating earnings benchmarks and the cost of deb. The Accounting
Review, 83(2), 377–416. https://doi.org/10.2308/accr.2008.83.2.377
Ji, Y., Rozenbaum, O., & Welch, K. (2017). Corporate Culture and financial reporting risk:
Looking Through the glassdoor. Working paper. George Washington University.
Judge, T. A., & Larsen, R. J. (2001). Dispositional affect and job satisfaction: A review
and theoretical extension. Organizational Behavior and Human Decision Processes, 86
(1), 67–98. https://doi.org/10.1006/obhd.2001.2973
Kanagaretnam, K., & Sarkar, S. (2011). Managerial compensation and the
underinvestment problem. Economic Modelling, 28(1–2), 308–315. https://doi.org/
10.1016/j.econmod.2010.08.017
Khavis, J. A., & Krishnan, J. (2021). Employee satisfaction and work-life balance in
accounting firms and audit quality. Auditing: A Journal of Practice & Theory, 40(2),
161–192. https://doi.org/10.2308/AJPT-18-029
Kidwell, R. E., & Valentine, S. R. (2009). Positive group context, work attitudes, and
organizational misbehavior: The case of withholding job effort. Journal of Business
Ethics, 86, 15–28. https://doi.org/10.1007/s10551-008-9790-4
Kim, Y., Park, M. S., & Wier, B. (2012). Is earnings quality associated with corporate
social responsibility? The Accounting Review, 87(3), 761–796. https://doi.org/
10.2308/accr-10209
Lambert, R. A., Leuz, C., & Verrecchia, R. E. (2011). Information asymmetry, information
precision, and the cost of capital. Review of Finance, 16, 1–29. https://doi.org/
10.1093/rof/rfr014
Landers, R. N., Brusso, R. C., & Auer, E. M. (2019). Crowdsourcing job satisfaction data:
Examining the construct validity of Glassdoor.com ratings. Personnel Assessment and
Decisions, 5. https://doi.org/10.25035/pad.2019.03.006. Article 6.
Langli, J. C., & Svanström, T. (2014). Audits of private firms. In D. Hay, W. R. Knechel, &
M. Willekens (Eds.), Routledge companion to auditing (pp. 148–158).
Li, J. (2022). The effect of employee satisfaction on effective corporate tax planning:
Evidence from Glassdoor. Advances in Accounting, 57, Article 100597. https://doi.
org/10.1016/j.adiac.2022.100597
Locke, E. A. (1976). The nature and causes of job satisfaction. In M. D. Dunnette (Ed.),
Handbook of industrial and organizational psychology (pp. 1297–1343). Chicago: Rand
McNally.
Maslow, A. H. (1943). A theory of human motivation. Psychological Review, 50(4),
370–396. https://doi.org/10.1037/h0054346
McDonell, B. H. (2011). Strategies for an employee role in corporate governance. Wake
Forest Law Review, 46, 429–446.
McNichols, M. F., & Stubben, S. R. (2008). Does earnings management affect firms’
investment decisions? The Accounting Review, 83(6), 1571–1603. https://doi.org/
10.2308/accr.2008.83.6.1571
Minnis, M. (2011). The value of financial statement verification in debt financing:
Evidence from private U.S. Firms. Journal of Accounting Research, 49(2), 457–506.
https://doi.org/10.1111/j.1475-679X.2011.00411.x
Minnis, M., & Shroff, N. (2017). Why regulate private firm disclosure and auditing?
Accounting and Business Research, 47, 473–502. https://doi.org/10.1080/
00014788.2017.1303962
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the
theory of investment. The American Economic Review, 48(3), 261-197.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics,
5(2), 147–175. https://doi.org/10.1016/0304-405X(77)90015-0
Organ, D. W., & Ryan, K. (1995). A meta-analytic comparison of self-reported and other-
reported organizational citizenship behavior. Personnel Psychology, 48(4), 775–802.
Pandey, R., Biswas, P. K., Ali, M. J., & Mansi, M. (2020). Female directors on the board
and cost of debt: Evidence from Australia. Accounting and Finance, 60(4), 4031–4060.
https://doi.org/10.1111/acfi.12521
Pawlina, G. (2010). Underinvestment, capital structure and strategic debt restructuring.
Journal of Banking & Finance, 16(5), 679–702. https://doi.org/10.1016/j.
jcorpfin.2010.06.010
Petersen, M. A. (2009). Estimating standard errors in finance Panel data sets: Comparing
approaches. Review of Financial Studies, 22(1), 435–480. https://doi.org/10.1093/
rfs/hhn053
Rajkovic, T. (2020). Lead independent directors and investment efficiency. Journal of
Corporate Finance, 64, Article 101690. https://doi.org/10.1016/j.
jcorpfin.2020.101690
Reichelstein, S. (1997). Investment decisions and managerial performance evaluation.
Review of Accounting Studies, 2, 157–180. https://doi.org/10.1023/A:
1018376808228
Schneider, D. S., & Vaught, B. C. (1993). A comparison of job satisfaction between public
and private sector managers. Public. Administration Quarterly, 17(1), 68–83.
Schwartz, M. S., Dunfee, T. W., & Kline, M. J. (2005). Tone at the top: An ethics code for
directors? Journal of Business Ethics, 58, 79. https://doi.org/10.1007/s10551-005-
1390-y
Sengupta, P. (1998). Corporate disclosure quality and the cost of debt. The Accounting
Review, 73(4), 459–474.
Smith, C. W., Jr. (1993). A perspective on accounting-based debt covenant violations.
The Accounting Review, 68(2), 289–303.
Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information.
The American Economic Review, 71(3), 393–410.
Sun, J. (2009). Governance role of analyst coverage and investor protection. Financial
Analysts Journal, 65(6), 52–64. https://doi.org/10.2469/faj.v65.n6.2
S. Arvidsson et al.
Svanström, T. (2013). Non-audit services and audit quality: Evidence from private firms.
European Accounting Review, 22(2), 337–366. https://doi.org/10.1080/
09638180.2012.706398
Trevino, L. K., & Weaver, G. R. (2001). Organizational justice and ethics program
“follow-through”: Influences on employees’ harmful and helpful behavior. Business
Ethics Quarterly, 11(4), 651–671. https://doi.org/10.2307/3857765
Van Tendeloo, B., & Vanstraelen, A. (2008). Earnings management and audit quality in
europe: Evidence from the private client segment market. European Accounting
Review, 17(3), 447–469. https://doi.org/10.1080/09638180802016684
Versano, T. (2020). Enforcement of optimal disclosure rules in the presence of moral
hazard. European Accounting Review, 29(4), 825–849. https://doi.org/10.1080/
09638180.2019.1696216
Vroom, V. H. (1964). Work and motivation. New York: Wiley.
15
European Management Journal xxx (xxxx) xxx
Ward, C., Yin, C., & Zeng, Y. (2020). Motivated monitoring by institutional investors and
firm investment efficiency. European Financial Management, 26(2), 348–385. https://
doi.org/10.1111/eufm.12232
Wisse, B., van Eijbergen, R., Rietzschel, E. F., & Scheibe, S. (2018). Catering to the needs
of an aging workforce: The role of employee age in the relationship between
corporate social responsibility and employee satisfaction. Journal of Business Ethics,
147, 875–888. https://doi.org/10.1007/s10551-015-2983-8
Yoshikawa, H. (1980). On the "q" theory of investment. The American Economic Review,
70(4), 739–743.
Zhang, M., Zhang, W., & Zhang, S. (2016). National culture and firm investment
efficiency: International evidence. Asia-Pacific Journal of Accounting & Economics, 23
(1), 1–21. https://doi.org/10.1080/16081625.2015.1027714