September 22, 2021 • By Keith Giles
Professors Terry Shevlin and Ben Lourie of The UCI Paul Merage School of Business, together with their colleagues Qin Li of Hong Kong Polytechnic University School of Accounting and Finance and a graduate of the doctoral accounting program at UCI, and former UCI faculty member Alex Nekrasov of the University of Illinois at Chicago, took a deep dive into the question of whether employee turnover is an essential human capital metric for investors to consider. Their paper, Employee Turnover and Firm Performance: Large-Sample Archival Evidence, is forthcoming in Management Science.
“As the SEC considers requiring the disclosure of human capital information like this in the future, we wanted to examine the impact that employee turnover might have,” says Lourie. “Is it material information? Because the collection and reporting of this information does carry a cost for the firm, it’s important to know in advance how much employee turnover informs about a firm’s future performance.”
Going in search of deep data
With this question in mind, Lourie, Shevlin and their team set out to find sources that might provide answers. “Because the SEC does not require this information, finding the data was not easy,” says Lourie.
Prior studies on how employee turnover impacted future performance tended to use very small samples. Lourie and Shevlin were looking for a more robust sample of data for their study. “We talked to Revelio Labs, a leading provider of labor market analytics, who provided us with ten years of data gathered from employee profiles on LinkedIn,” says Lourie. “Using this we could see how long someone was at a firm and aggregate who was at the company in a given month.”
Of course, they had to take into account that the data wasn’t always completely accurate. “For one thing, not everyone updates their LinkedIn profiles,” says Shevlin. “We also had to consider that LinkedIn is mostly for white-collar employees. And white-collar employees are typically harder and more costly to replace than blue-collar workers.”
Another factor was the size of the company. “Smaller and younger firms tend to suffer the most from high turnover,” says Lourie. “They’re not as adept at handling turnover compared to larger firms who can absorb the costs a little better.”
Just how bad is turnover?
The team needed to take into consideration the variety of reasons why a business might experience employee turnover. “Turnover could be a sign that a company is doing badly and need to cut staff to remain profitable,” says Shevlin. “Or it could simply be that the employee had to be fired, or that they discovered a better opportunity at another firm. Not all turnover is necessarily bad, nor is it always an indication of a company’s future performance.”
They identified a data set that almost no one has looked at before and what they found was eye-opening. “As one might expect, turnover is bad for the firm,” says Lourie. “But only at higher levels. For example, even up to the 50 percentile, most firms were still performing well in subsequent quarters over the ten-year time frame of our study.”
Still, even a small turnover rate could be bad for the company if it comes during a single quarter. “The median turnover rate was .03 per quarter,” Shevlin explains. “One could interpret this to say that if turnover is greater than 3 percent in a single quarter, giving due consideration to industry-wide trends, future performance suffers. When you look at tech firms, for example, they are competing for essentially the same employees. This involves perks, salary increases, equity grants, signing bonuses, and so on, which makes employee turnover extremely costly.”
Accounting for the cost of good people
The high cost of retention and recruiting makes employee turnover rate relevant to future performance. “It’s not just about not having enough staff. It’s the fact that turnover is very costly to these firms,” Lourie says. “When you’re constantly increasing salaries, onboarding new talent, training and investing in their skills, the money lost when that employee leaves is significant.” When a firm must replace multiple employees in a year, these costs can severely impact profitability.
The bottom line is that employee turnover is a key metric of human capital. “In our study, we found that turnover is directly associated with lower future financial performance,” says Lourie. So disclosure of this data would be of great use to investors and also to the company. “What our research shows is that investing in employee retention is very important for firms,” says Shevlin. “The disclosure of this data can predict one quarter ahead the sales and stock returns of a firm. That strongly suggests that, aside from what it might costs the firms to disclose it, the data would be very useful for investors to consider.”
Ben Lourie is an associate professor of accounting at The UCI Paul Merage School of Business. His research interests are broad and include financial reporting and disclosure, capital markets, financial analysts, and human capital. His work examines among other issues equity analysts’ conflict of interests, psychological biases, and the informativeness of human capital measures. Lourie has published in top-tier journals such as The Accounting Review, Journal of Financial Economics, Management Science, Review of Accounting Studies, and Review of Finance. His research has been covered by the Wall Street Journal, Financial Times, Business Insider, Bloomberg and International Business Times. Ben has taught at the master and PhD levels. He currently teaches financial statement analysis and SAS and STATA boot camp. Ben earned his PhD from the UCLA Anderson School of Business and his bachelor’s degree in economics from Tel Aviv University. Ben worked as a senior consultant in Deloitte Management Consulting.
Terry Shevlin is a professor of accounting and Paul Merage chair in business growth at The UCI Paul Merage School of Business. He earned his PhD from Stanford University in 1986 and joined the faculty at the University of Washington where he worked for 26 years until joining UCI in 2012. He has served as editor on three academic journals and on numerous editorial boards. He has published over 55 articles in the very top accounting and finance journals. His research interests are broad and include the effect of taxes on business decisions and asset prices, capital markets-based accounting research, earnings management, employee stock options, research design and statistical significance testing issues.