1 s2.0 S0927538X16302013 Main PDF

Pacific-Basin Finance Journal 40 (2016) 191–209
Contents lists available at ScienceDirect
Pacific-Basin Finance Journal

journal homepage: www.elsevier.com/locate/pacfin
Do employee relation responsibility and culture matter for firm

value? International evidence
Jaeho Lee a, Hakkon Kim b,⁎
a
Kyung Hee University, Department of International Business and Trade, 26 Kyunghee-daero, Dongdaemun-gu, Seoul 02447, Republic of Korea
b
Chungbuk National University, Department of International Business, College of Business, Chungdae-ro 1, Seowon-Gu, Cheongju, Chungbuk 28644, Republic of Korea
a r t i c l e i n f o a b s t r a c t
Article history: Using a dataset on employee relation responsibility (ERR) from 30 countries, we examine the effects
Received 29 March 2016 of employee relationships on firm value. In addition, this paper attempts to understand the role of
Received in revised form 4 October 2016 national cultural dimensions regarding their relation with ERR and firm value. We find that firms
Accepted 19 October 2016
with good employee relationships tend to demonstrate significantly higher levels of firm value
Available online 21 October 2016
than firms whose employees exhibit poor rapport. We also find that the positive impact of ERR on
firm value is significantly strengthened in cultures with high degrees of power distance, collectivism,
Keywords: masculinity, and risk avoidance. These results are robust even after mitigating endogeneity issues,
Employee relation responsibility (ERR)
adjusting sample composition bias and using alternative independent variables. Our findings extend
Power distance
the previous CSR-related research into a new horizon, with the objective of investigating this less ex-
Collectivism
Masculinity plored subject within the sub-areas of CSR research. The findings of this study are noteworthy given
Risk avoidance that we incorporate the role of national culture into the ERR-firm value link, a task that has not yet
Firm value been undertaken.
© 2016 Elsevier B.V. All rights reserved.
1. Introduction
Financial implications of corporate social responsibility (CSR) have captured academic attention. As is well known in the CSR liter-
ature, stakeholder theory, as postulated by Freeman (1984), asserts that a company must consider and satisfy a variety of constituents,
such as workers, consumers, suppliers, and local community, all of whom can affect or be affected by the company1. Stakeholder theory
implies that a company can secure support from its related constituents by enhancing its engagement in certain CSR activities and that
its CSR-oriented activities connecting social dimensions with business models can offer benefits that enhance the company's perfor-
mance and lead to long-term survival. Although several studies have revealed either a negative link or no link between CSR and firm
performance or value, many studies have exhibited a positive relation between the two constructs2. In this paper, we aim to answer
⁎ Corresponding author.
E-mail addresses: jaeholee@khu.ac.kr (J. Lee), kimhk0283@chungbuk.ac.kr (H. Kim).
1
CSR is posited to integrate social dimensions into economic activities by incorporating more employee-friendly human resource management (HRM) practices (Bae
et al. 2011; Jones et al. 2014; Collier and Esteban 2007), accomplishing higher levels of environmental performance via pollution reduction and recycling activities (Jo et
al. 2015; Miles and Covin 2000), pursuing mutually beneficial transactions with suppliers (Andersen and Skjoett-Larsen 2009), and considering the goals of the local
community (Kapelus 2002).
2
For instance, Waddock and Graves (1997) find that CSR leads to an increase in firm performance. Russo and Fouts (1997) also observe that CSR activities focused on
environment improvement demonstrate a positive relation with financial performance. Gao et al. (2012) find a positive link between CSR activities and financial per-
formance by exploring the equity market impact of corporate donations. Hillman and Keim (2001) find that stakeholder management CSR conducted in an effort to
build constructive relations with primary stakeholders such as employees, customers, suppliers, and communities can result in positive shareholder wealth creation
measured by market value added, while social CSR issues that are not directly related to primary stakeholders may not create value for shareholders.
http://dx.doi.org/10.1016/j.pacfin.2016.10.006
0927-538X/© 2016 Elsevier B.V. All rights reserved.
192 J. Lee, H. Kim / Pacific-Basin Finance Journal 40 (2016) 191–209
this widely explored CSR-linked question: do companies do well by doing good? However, rather than focusing on the role and impact
of overall CSR for empirical analysis, we investigate a specific area of CSR from inside stakeholder relationships, that of employee rela-
tionships, as such relationships have great potential to influence firm value. Research indicates that good employee relationships within
a company help the firm appear attractive to current employees who are and new job candidates who will be more likely to commit
themselves to the performance of the company. Hence, our research aims to contribute to academia by analyzing the impact of the
stakeholder relationship with employees on firm value, thus extending the previous related empirical research connected with CSR
into a new horizon with the objective to fill this less explored area of CSR and related finance research. We posit that a company's em-
ployee relation responsibility (ERR) is a sub-category of CSR and that it addresses the company's comprehensive concerns for
employees.
We also attempt to understand the role of national cultural dimensions in the association between employee relation respon-
sibility and firm value. National cultural dimensions have recently been used in financial studies to examine their roles in inves-
tors' trading activities and stock price movements (Eun et al. 2015), cross-border merger volumes and synergy gains (Ahern et al.
2015), trading volume, volatility and momentum profits around the world (Chui et al. 2010), and allocation of funds in interna-
tional portfolio holdings (Karolyi 2016). Previous studies have also found that national culture has a considerable influence on
business ethics and CSR. Since Hofstede (1980, 1983, 1984, 1997) identified the cultural dimensions that differ across countries,
several researchers have attempted to understand the substantial extent to which national culture impacts companies’ attitudes
and behaviors in terms of business ethics and CSR (Christie et al. 2003; Moon and Franke 2000; Blodgett et al. 2001; Vitell et
al. 2003; Waldman et al. 2006). For example, Christie et al. (2003), using survey data from the US, Korea, and India, find that cul-
tural dimensions of individualism and power distance have a strong influence on business managers' perceptions towards general
aspects of business ethics and a variety of questionable business practices, such as bribery and nepotism. We attempt to extend
the previous research on the relationship between national culture and CSR by investigating the combined effect of ERR and na-
tional culture on firm value and interpret the ERR-firm value association in view of cultural dimensions in different countries. To
our best knowledge, this empirical research is the first endeavor to examine relationships with employees in the setting of CSR-
related stakeholder relationships, national cultural dimensions, and firm value.
This study first examines the impact employee relationships have on firm value and provides empirical evidence that ERR is
positively and significantly related to firm value. We also hypothesize that the impact of ERR on firm value will be strengthened
by national cultural dimensions across countries, and we obtain an empirical finding that ERR has significantly greater effects on
firm value in all cultural dimensions when measured as the levels of power distance, collectivism, masculinity, and risk avoidance.
In addition to the multivariate analyses, we perform supplementary tests that consider endogeneity issues from the perspective of
reverse causality, time-invariant omitted variables, and sample composition bias. We also use alternative independent variables to
ensure the robustness of our empirical results. After these tests, we still find that the impacts of ERR and its interaction with cul-
tural dimensions on firm value are still positive and significant.
The remainder of this paper is organized as follows. In Section 2, we account for the theoretical perspective on the association
of employee relations with firm value in the CSR framework and extend this theoretical perspective with cultural dimensions. We
also formulate testable hypotheses in this section. In Section 3, we describe the research methods in relation to econometric spec-
ifications and data sources. Empirical results are presented in Section 4, and we summarize our findings, implications and limita-
tions in Section 5.
2. Literature review and hypothesis development
2.1. CSR, employee relation responsibility (ERR), and firm value
CSR involves the firm's response to issues beyond the narrow technical and legal requirements of the organization and con-
siders the various stakeholders, i.e., those groups and individuals who are related to the operation and performance of the orga-
nization (Freeman 1984). By embracing CSR, a company provides benefits for society in general by improving the environment
and reducing social inequality. More particularly for the firm itself, CSR leads to an increase in corporate value by enhancing its
reputation and, in turn, increasing its potential to charge a premium price for products and recruit and retain high-quality
workers. Accordingly, adopting CSR can be advantageous to both corporate shareholders and stakeholders, which presents a po-
tential win–win situation.
The literature on CSR proposes a number of theoretical implications regarding how CSR activities are linked to firm value. For
example, CSR can promote a positive brand image (Moskowitz 1972), nurture good client relationships (Solomon and Hanson
1985), reduce company vulnerability to negative legal and regulatory actions as a result of the reduction of information asymme-
try with respect to stakeholders (Porter and Van der Linde 1995; Freeman 1984), and attract investments from socially respon-
sible institutions and individuals (Cheng et al. 2014). In this regard, CSR can increase firm value, and thereby help the
company identify several channels through which CSR can effect financial benefits. Examples include, but are not limited to, a
strong recommendation from securities analysts (Ioannou and Serafeim 2015) and a greater likelihood to access finance
(Cheng et al. 2014). Although CSR may raise related expenditures considerably, the potential financial benefits will appear in
the long run if a company carefully manages the CSR process (Henderson 2002).
In this research, we state that a company's endeavor to provide benefits for employees, one group of company stakeholders, in
the overall CSR context can also lead to higher firm value. Little research has examined the association between a company's so-
cial responsibility for employees and firm value, Furthermore, there is no specific established terminology representing the
J. Lee, H. Kim / Pacific-Basin Finance Journal 40 (2016) 191–209 193
stakeholder relationship with employees with respect to CSR. However, we contend that the stakeholder relationship with em-
ployees can be broadly understood in the setting of employee relation responsibility (ERR) because it largely defines the relation-
ship with employees within the company in terms of how the company treats its employees and what the company provides to
ensure more employee-friendly working environments to satisfy their needs and desires. ERR among stakeholder relationships
has considerable potential to influence firm value, as maintaining good employee relationships increases the company's attractive-
ness to its workers and job candidates, thus enhancing its capability to recruit high-quality workers, reduce hiring costs, and in-
crease its employee retention rate (Turban and Greening 1997; Albinger and Freeman 2000; Greening and Turban 2000).
We argue that employee relation responsibility as a sub-category of CSR embodies a company's continuing and consistent en-
deavors and attempts to maintain and improve a constructive relationship with employees by providing both tangible and intan-
gible benefits and satisfactory working environments. Furthermore, ERR may include a range of high-performance workplace
systems (HPWSs) that are devised to increase job satisfaction among employees in the form of incentive compensation, working
conditions, fringe benefits etc., but rather constitutes a company's wide-ranging engagement and participation in socially respon-
sible behaviors to improve employee treatment. ERR includes a company's actions and related investments to provide safe and
sound working environments (health and safely); to improve employee skills and abilities and offer an opportunity for career de-
velopment (training and development); to promote a more varied composition of employees (diversity); and to ensure employee
freedom to express opinions and avoid forced and child labor in the workplace (human rights). ERR can be estimated as an in-
dicator of how a company addresses these areas.
Investing in employee relationship (and CSR) attributes and activities could be important factors in the building of a firm's rep-
utation (Edmans 2011) and in the differentiation of products. ERR can lead to increased job satisfaction, which can be an inter-
mediate pathway for a company to achieve greater performance, thus resulting in increased firm value. Within this discussion,
we propose the following hypothesis.
Hypothesis 1. The improvement of employee relation responsibility (ERR) will have a positive impact on firm value.
2.2. Employee relation responsibility (ERR), cultural dimensions, and firm value
Many cross-cultural studies attempt to capture the impact of national culture on a person's ethical attitudes and behaviors at the
individual employee level (e.g., Allmon et al. 1997; Hood and Logsdon 2002). Researchers use Hofstede's cultural dimensions to
operationalize culture and apply them to the process of identifying their impacts on ethical behavior and decision making within or-
ganizations (e.g., Christie et al. 2003; Blodgett et al. 2001; Vitell et al. 2003; Moon and Franke 2000). A conceptual model developed by
Vitell et al. (1993), using Hofstede's original four cultural dimensions, postulates that a strong relationship could exist between these
dimensions and the managerial ethical decision making of companies. Hofstede (1980, 1983, 1984, 1997) identifies the following four
cultural dimensions: power distance, individualism/collectivism, masculinity/femininity, and uncertainty avoidance.
The power-distance dimension indicates that workers in countries with a high power distance are more likely to accept hier-
archies and authority within the organizations and follow the opinions of their superiors (Hofstede 1983; Vitell et al. 2003). While
the employees in low power distance cultures easily approach their superiors and exhibit less fear expressing disagreement with
them, those in high power distance environments struggle to challenge and contradict their superiors and tend to comply fully
with their superiors' orders. This suggests that when workers in high power-distance countries involve unethical management is-
sues, they are more likely to look to their superiors for guidance and may engage in questionable actions when they believe an
action is in the best interest of the company (Blodgett et al. 2001). Accordingly, it is also plausible that managers in high
power-distance countries may not be sensitive to employment treatment issues because their autocratic leadership is generally
based on unequally distributed power and because superiors are likely to exert their authority unfavorably and unfairly over
their subordinates. Given our previous discussion about the potential for higher firm value from investing in employee relation-
ships, it may be more likely that companies operating in high power-distance countries will gain more benefits by investing in
employee relationships as the decision to adopt a higher level of employee relationships in once-autocratic and unequally
powered companies and transform the company's CSR policy will have greater marginal impacts on the behaviors and perfor-
mances of employees who have not previously experienced appropriate employee treatment. Moreover, relatively faster decision
making and strategy implementation in high power-distance cultures may be more advantageous and more likely to evoke higher
effects of ERR, which will be subsequently reflected in firm value.
The individualism/collectivism dimension indicates that collectivists are dependent on others because they think of themselves
as parts of organizations, endeavor to achieve group success rather than seeking personal accomplishments, and tend to embrace
the ideological identity of the organizations to which they belong, while individualists are emotionally independent, exhibit a high
need to fulfill their self-interests, and may not want to be confined to organizational rules and regulations (Hofstede 1984;
Peabody 1985; Singelis et al. 1995). Although collectivists may be likely to adopt an organizational code of ethics even at the ex-
pense of personal interest (Akaah 1992), Moon and Franke (2000) find that bribery is more acceptable in collectivist cultures than
in individualistic ones. Christie et al. (2003) also argue that managers in countries with low collectivism, and thus high individ-
ualism, tend to be more sensitive to ethical issues and view business practices such as gift-giving, nepotism, and software piracy
as more unethical than do managers in countries with high collectivism. We argue that, given the lower sensitivity to employ-
ment treatment issues in a collectivist society, the effect of investing in ERR is likely higher in the collectivist culture as unit in-
vestment in ERR exhibits a higher marginal effect on firm value.
The masculinity/femininity dimension suggests that cultures featured as masculine compel individuals to be ambitious, asser-
tive, competitive, and achievement-oriented, while individuals in feminine cultures are encouraged to be modest, humble, caring,
and relationship-oriented (Hofstede 1983, 1984). The literature generally documents that highly masculine individuals are less
sensitive to the interests of other stakeholders and are less likely to perceive ethical problems than the counterparts in feminine
cultures due to the tendency in the masculine culture to seek personal financial gain within a very competitive atmosphere (Vitell
and Festervand 1987; Chang and Ding 1995). This indicates that companies dominated by masculine cultures are less likely to
engage in a range of human resource management practices that promote favorable employee treatment and that are comprising
of varied tools, techniques, and incentives. Conversely, companies dominated by feminine cultures tend to embrace more employ-
ee-friendly human resource policies and take proactive steps to engage in employee relationship-oriented actions, such as work-
family programs, affirmative action for the recruitment of minorities, etc. We expect that investing in ERR may result in higher
marginal effects on firm value in countries with masculine cultures than in those with feminine cultures because the adoption
of the ERR in companies dominated by masculine cultures provides them an opportunity to undergo a dramatic transformation
in CSR, which, in turn, will result in a greater increase in value creation.
The uncertainty avoidance dimension suggests that workers from societies with strong uncertainty avoidance tend not to ac-
cept any deviations from group/organizational norms compared to those from countries with weak uncertainty avoidance (Ferrell
and Skinner 1988). This may imply that organizations in high uncertainty-avoidance countries prefer to have formal rules to reg-
ulate the ethical behaviors of the workers who, by their nature, would not avoid or ignore internal norms/cultures (Vitell et al.
1993). However, despite this rigidity in adhering to the formal rules, it may take a great deal of time for organizations governed
by strong uncertainty avoidance to make a decision regarding the adoption of rules for business ethics, let alone employee rela-
tionships. When organizations are dominated by high uncertainty avoidance, they are risk averse, which indicates that they may
not be aggressively searching for new investment opportunities or that they experience a deliberate and lengthy process before
reaching a final decision to relocate resources to an investment alternative. With respect to companies with high uncertainty
avoidance, investment in employee relationships may be perceived as highly risky as it may be considered to demonstrate the
potential for failure, and accordingly, it may require a long-term management perspective. Therefore, it is plausible that managers
in high uncertainty-avoidance countries will hesitate to invest in employee relation responsibility and may be insensitive to em-
ployment treatment issues. Consistent with the aforementioned marginal effect concerns regarding the other cultural dimensions,
a firm's effort to improve ERR could be more effective in the enhancement of firm value in high risk-avoidance cultures, as they
are more likely to lack consideration for employees and less likely to invest in employees. Moreover, the emphasis on ERR issues
in legal terms in high uncertainty-avoidance cultures (Christie et al. 2003) may gradually draw increasing public attention to ERR
and thereby improve employee treatment practices and positively affect the firm's value in the long term.
All in all, our expectation regarding the impact of ERR on firm value in countries with different cultural dimensions is that the
marginal effect of ERR will be greater in countries with higher power-distance, stronger collectivism, greater masculinity, and
stronger risk avoidance. We argue that ERR can produce much greater impact in these countries with stronger potential for rep-
utation building and that it can provide companies with opportunities to decrease hiring costs, retain high-quality workers, and
attract capable workers who have been searching for one of the rare companies that treats people well in that cultural context.
The marginal effects of investments in ERR can be greater for firms that have fewer and less restrictive policies, procedures,
and regulations regarding employee treatment compared to firms with numerous rigid policies and regulations whose invest-
ments in ERR may result in lower employee satisfaction and less impact on employees according to the economic theory of
the law of diminishing marginal utility3. Thus, the following hypotheses are proposed.
Hypothesis 2. Cultural dimensions strengthen the positive relationship between employee relation responsibility (ERR) and firm
value.
Hypothesis 2-1. The impact of ERR on firm value will be more prominent in countries with high power-distance cultures.
Hypothesis 2-2. The impact of ERR on firm value will be more prominent in countries with strong collectivist cultures.
Hypothesis 2-3. The impact of ERR on firm value will be greater in countries with strong masculine cultures.
Hypothesis 2-4. The impact of ERR on firm value will be higher in countries with strong risk-avoidance cultures.
3. Empirical setting
3.1. Sample construction
Our empirical analysis centers on testing our hypotheses regarding the effects of employee relation responsibility and its in-
teractive effects of cross-cultural dimensions on firm value. To test the hypotheses, we use the following four databases: (i) Thom-
son Reuters ASSET4, which provides the score relating to employee relation responsibility at the firm level worldwide; (ii) Hofstede
3
See Layard et al. (2008) and Finkelstein et al. (2013) to gain an understanding of how this concept applies to the behaviors of rational economic agents.
Centre, which reports Hofstede's cultural dimensions; (iii) Capital IQ, which provides financial statement data; and (iv) World
Bank, which offers information on the logarithm of GDP per capita, GDP growth volatility, and governance indicators.
Our sample consists of a panel of 16,693 firm-year observations from 30 countries for the period 2002 to 2012, of which 3342
are from seven Asia-Pacific countries, 6347 observations are from nineteen European countries, and 7004 observations are from
four countries in North/South America.4 Table 1 reports the descriptive statistics of the key variables used in our empirical
tests. The mean (median) value of ERR is 54.24 (56.6). The mean (median) values of power distance and collectivism are 44.65
(40.00) and 26.89 (11.00), respectively. The mean (median) values of masculinity and uncertainty are 62.25 (60.00) and 57.57
(46.00), respectively. All continuous variables are winsorized at the 1% and 99% levels to consider potential outlier problems or
data errors.
3.2. Employee relation responsibility (ERR)
For our empirical analysis, we use a panel dataset where the ERR index was obtained from the Thomson Reuters ASSET4 da-
tabase, a database that has been used in a number of recent studies as a subdomain of the CSR index (McWilliams and Siegel
2001; Cheng et al. 2014; Ioannou and Serafeim 2015; Roulet and Touboul 2015). The Thomson Reuters ASSET4 is a leading pro-
vider of the world's largest objective, comparable, and auditable database of ESG information. Cheng et al. (2014) also argue that
the Thomson Reuters ASSET4 specializes in providing objective, relevant, auditable, and systematic ESG information to industries
and academia.
The ESG information is composed of environmental, social, and (corporate) governance indexes that are collected by more
than 130 specially trained analysts from annual reports, company websites, proxy filings, and NGOs as well as from news reports
of all major providers (see Thomson Reuter's data collection and rating methodology). Among the ESG information (i.e., environ-
mental, social, and corporate governance indexes), the social index is aimed at measuring the quality of relationships between a
firm and its employees. Therefore, we use the social index as our main measure of ERR. In addition, for the robustness tests, we
use an equally weighted ERR index (i.e., EW employee relation), which is defined as the equal weighting of the (mostly) employ-
ee-related (five) sub-social indexes, namely, (a) employment quality index, (b) training and development index, (c) health and
safety index, (d) diversity index, and (e) human rights index.5 Our measures of ERR (i.e., ERR and EW ERR) are normalized to
a z-score (i.e., a standard score) and multiplied by 100 to simplify the interpretation of regression coefficients (for more detail
on the employee relation index, see Appendix A).
3.3. Hofstede's cultural dimensions
Hofstede's cultural dimensions are the most widely used cross-country measures to facilitate an understanding of national cul-
tural differences in financial studies (Ahern et al. 2015; Eun et al. 2015; Waldman et al. 2006). Furthermore, the cultural dimen-
sions have been regarded as one of the more important factors linked to business ethics and CSR decision making (Moon and
Franke 2000; Blodgett et al. 2001; Christie et al. 2003; Vitell et al. 2003). Hofstede (2001) first used the data obtained from
the survey results of IBM employees in 40 countries, after which the database was expanded to more than 70 countries. Because
Hofstede's database is collected within the IBM Corporation, McSweeney (2002) criticizes Hofstede's dimensions, claiming the
samples in the studies are not nationally representative. However, a large body of literature, including Williamson (2002), contra-
dicts the concern of McSweeney (2002) and argues that Hofstede's model can effectively explain relative cultural differences
across countries because organizational cultures reflect the national culture.
Hofstede's cultural dimensions are composed of four primary measures, namely, power distance, collectivism/(individualism),
masculinity, and uncertainty avoidance, for a maximum of 100 points. Power-distance measures the level of hierarchy in a society.
Individuals in high power-distance societies are likely to admit the inequality of power and differences between superiors and
subordinates. Higher scores on the collectivist index indicate that individuals tend to think of themselves as part of the organiza-
tion and that they endeavor to achieve group success, while lower scores on the collectivist index indicate that individuals tend to
fulfill their self-interests, value their personal freedom, and avoid confining themselves to collectivist obligations. Although
Hofstede distinguishes between the power distance and collectivism dimensions, these two dimensions seem to share many anal-
ogous aspects and co-move closely with each other in terms of their impacts on employees and their similarity in meaning. There-
fore, we interpret the effect of the collectivism dimension together with the effect of the power-distance dimension for the
analysis to avoid overlapping the application of these similar dimensions (see Panel B of Table 2). Higher scores on the masculin-
ity index indicate the dominance of traditional social male values, such as a preference for achievement, heroism, assertiveness,
and material success (Hofstede 1984). However, lower scores on the masculinity index indicate the dominance of feminine values,
which are characterized as tender, humble, caring, benevolent, and relationship-oriented (Hofstede 1984). Uncertainty avoidance
refers to the society's tolerance for uncertain and unknown situations. Individuals in high-uncertainty societies are likely to be
4
Our data contain seven Asia-Pacific countries (Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, and Thailand), nineteen European countries (Austria,
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, and Unit-
ed Kingdom), and four North/South American countries (Brazil, Chile, Mexico, and the United States).This paper's data work was initiated while Hakkon Kim was at
KAIST. He is now serving as an assistant professor at Chungbuk National University.
5
We use the (original) social score as our main measure of ERR and the equally weighted ERR index as our second measure of employee relation to reduce the po-
tential measurement biases that can occur when we arbitrarily calculate the equal weighting of the (mostly)employee-related (five) sub-social indexes.
Table 1
Descriptive statistics.
Variable Obs. Mean Median Standard deviation P(0.25) P(0.75)
Employee relation 16,693 54.243 56.600 30.374 24.970 83.910

EW employee relation 16,693 49.192 48.807 10.962 41.831 56.809
Power distance 16,693 44.650 40.000 12.881 35.000 54.000
Collectivism 16,693 26.886 11.000 21.856 9.000 49.000
Masculinity 16,693 62.247 62.000 19.994 62.000 66.000
Uncertainty 16,693 57.570 46.000 22.100 46.000 85.000
Tobin's q 16,693 1.263 0.808 1.967 0.566 1.355
Leverage 16,693 0.246 0.234 0.169 0.118 0.352
Log (total assets) 16,693 8.705 8.596 1.350 7.768 9.579
ROE 16,693 0.123 0.120 0.279 0.057 0.199
Capital expenditure 16,693 0.090 0.045 0.157 0.025 0.089
R&D/total assets 16,693 0.020 0.001 0.037 0.000 0.024
Log (GDP per capita) 16,693 10.585 10.672 0.415 10.545 10.787
GDP growth volatility 16,693 31.172 27.181 18.702 17.040 43.875
Governance indicators 16,693 7.770 8.140 2.145 7.300 8.870
This table reports the mean, median, standard deviation, first quartile, and third quartile for each variable used in our empirical tests.
risk-averse, resist change, place a premium on job security, and favor written rules in contrast to individuals in cultures with low
uncertainty avoidance societies (Hofstede 1984). We connect Hofstede's cultural dimensions with our ERR measures to examine
the combined effect of employee relation responsibility and national culture on firm value.
3.4. Residuals of Hofstede's cultural dimensions
In cross-country literature, the logarithm of GDP per capita is an important variable as it controls for economic development
(Stulz and Williamson 2003; Eun et al. 2015). However, as Panel A of Table 2 reveals, the logarithm of GDP per capita is strongly
correlated with Hofstede's cultural dimensions, measuring 0.75 (75%), thus raising the possibility of multicollinearity problems.
Thus, if we use both Hofstede's cultural dimensions and the logarithm of GDP per capita simultaneously in the same regressions,
our results can be biased due to the approximate linear relationship.
Thus, to mitigate multicollinearity concerns, we use the residuals of Hofstede's cultural dimensions as our key independent
variables following Graham (2003). Furthermore, by using the residuals, we can examine the combined actual effect of cultural
differences-employee relationship and firm value without the impact of economic development on firm value. Following
Graham (2003), our residuals of Hofstede's cultural dimensions are obtained from regressing each of Hofstede's cultural dimen-
sions on the logarithm of GDP per capita every year. In addition, we confirm the variance inflation factor (VIF), which is a widely
used multicollinear indicator and find that the values of the VIF are greater than 30 if we use both Hofstede's cultural dimensions
and the logarithm of GDP per capita simultaneously in the same regressions. The results indicate strong multicollinearity problems
and potential difficulties with least squares estimation. However, if we use the residuals of Hofstede's cultural dimensions instead
of the (original) Hofstede's cultural dimensions, the values of VIF are less than 7, indicating that there is a low possibility of
multicollinearity problems in our empirical analysis.
Table 2
Correlation matrix.
Panel A. Correlations between Hofstede variables and Log (GDP per capita)
Log (GDP per capita)
2012 2011 2010
Power distance −0.747 (0.000) −0.709 (0.000) −0.703 (0.000)

Collectivism −0.703 (0.000) −0.585 (0.000) −0.608 (0.000)
Masculinity 0.147 (0.000) 0.172 (0.000) 0.187 (0.000)
Uncertainty avoidance −0.334 (0.000) −0.186 (0.000) −0.196 (0.000)
Panel B. Correlations between Hofstede variables
Power distance Collectivism Masculinity
Collectivism 0.751
(0.000)
Masculinity −0.110 −0.404
(0.001) (0.000)
Uncertainty avoidance 0.320 0.516 −0.072
(0.000) (0.000) (0.008)
This table presents the Pearson (Spearman) correlations between Hofstede cultural dimension and log (GDP per capita), and between Hofstede cultural dimen-
sions. Correlations in bold are significant at b1% level. p-value is in parentheses.
3.5. Empirical model and variable
To ascertain whether a firm value is influenced by employee relation responsibility and its interactive effects of cross-cultural
differences, we regress Tobin's q on the ERR index and its interaction terms with the residuals of Hofstede's cultural dimensions.
The basic regression model used is as follows:
0 0
Tobin s q ¼ α0 þ α1 ERR þ α2 ERR Hofstede s residual cultural dimensions ð1Þ
ðpower distance residual; collectivism residual; masculinity residual; and uncertainty avoidance residualÞ
0
þα3 Hofstede s residual cultural dimensions þ ∑γ j control j þ ε
where the dependent variable, Tobin's q, is widely used as a measure of firm value in studies such as Chung and Pruitt (1994),
Chung and Jo (1996), and Servaes and Tamayo (2013). We employ the formula proposed by Chung and Pruitt (1994) to compute
Tobin's q, which is defined as (book value of assets + market value of equity − book value of equity) / (book value of assets).
ERR is the score of the equally weighted index of the following seven dimensions: employment quality, health and safety, training
and development, diversity, human rights, corporate community involvement, and product responsibility. Hofstede's cultural di-
mensions are the indexes that measure cross-cultural differences around the world. The dimensions range from 0 to 100 on var-
ious indexes, including power distance, collectivism, masculinity, and uncertainty avoidance. Following Graham (2003), we use
the residuals of Hofstede's cultural dimensions for minimizing the multicollinearity problem and find the combined actual effect
of cultural differences–ERR on firm value without the economic development impact on firm value (detailed explanations de-
scribed in the ERR, cultural dimensions, and firm value sections). The interaction terms between ERR and Hofstede's residual cul-
tural dimensions are used to indicate the differences in the effects of ERR on firm value among different cultures.6
We control for the differential effects of firm- and country-level characteristics on firm value by including leverage, log (total
assets), capital expenditure, R&D/total assets, log (GDP per capita), GDP growth volatility, and governance indicators. Leverage is
the ratio of the book value of debt divided by the total assets. Log (total assets) is the logarithm of the firm's total assets. Capital
expenditure is calculated as the capital expenditure expense divided by the total assets. R&D/total assets are calculated as the re-
search and development expenditures divided by the total assets. Log (GDP per capita) is the logarithm of GDP per capita, which
measures economic development of each country (Stulz and Williamson 2003; Eun et al. 2015). GDP growth volatility is used as a
measure of GDP growth volatility and estimated as the standard deviation of growth in GDP per capita over five years (Eun et al.
2015). Governance indicators are used to control for the differential governance system of each country (Morck et al. 2000). These
indicators are estimated as the sum of six indexes from Kaufmann et al. (2009), specifically, (i) voice and accountability, (ii) po-
litical stability and absence of violence/terrorism, (iii) government effectiveness, (iv) regulatory quality, (v) rule of law, and (vi)
control of corruption. The governance indicators provided by Kaufmann et al. (2009) are only available for the period 2002 to
2008. Therefore, following Eun et al. (2015), we assign the 2008 values for 2008 to 2012. We include year-, industry-, and coun-
try-level fixed effects in all specifications with the robust standard errors used in a study by White (1980). We provide more de-
tailed variable explanations in Appendix A.
4. Empirical results
4.1. Multivariate analysis
To examine the relationship between firm value and ERR, in Models 1 to 5 of Table 3, we regress the firm value on the ERR
index with control variables including country-, industry-, and year-fixed effects. In all models of Table 3, we find that the ERR is
strongly positively associated with Tobin's q, consistent with our expectation that the improvement of ERR leads to an increase in
firm value.
[Table 3 inserted]
We also test whether firm value is related to the interactive effects of cultural dimensions and ERR. We include interaction
terms between the residuals of Hofstede's cultural dimensions and the ERR index in Models 2 to 5 of Table 3. In Models 2 and
3 of Table 3, the coefficients of ERR × Power distance residual and ERR × Collectivism residual are positive and statistically signifi-
cant at the 1% level. Thus, our results suggest that the impact of ERR on firm value is more prominent in countries with more
autocratic, unequal power distribution with strong group and collectivistic norms (in higher power-distance cultures/collectivist
cultures). In Model 4 of Table 3, ERR × Masculinity residual is strongly positively related to Tobin's q, supporting the premise
that the impact of ERR on firm value is greater in countries with stronger masculine cultures where employees focus on the firm's
success and exhibit competition-oriented attitudes and behaviors and have less consideration for other people. The coefficient of
ERR × Uncertainty avoidance residual is positive and significant, indicating that the impact of ERR on firm value will be greater in
countries that are unwilling to take a risk in investment activity in ERR due to the potential danger of failure (strong risk-avoid-
ance cultures). Overall, our findings consistently reveal that the firms with higher ERR scores tend to demonstrate higher firm
values than firms with lower ERR scores. In addition, the positive ERR-firm value association becomes stronger when firms are
6
We employ one of Hofstede's residual cultural dimensions in each regression model (i.e., they are not used together in one regression model) to avoid the
multicollinearity problem among the cultural dimensions, following Christie et al. (2003).
Table 3
Employee relation, firm value, and cultural difference: fixed effect analysis.
Tobin's q
(1) (2) (3) (4) (5)
Employee relation: a 0.365⁎⁎⁎ 0.355⁎⁎⁎ 0.349⁎⁎⁎ 0.331⁎⁎⁎ 0.342⁎⁎⁎

(5.39) (5.30) (5.08) (4.74) (4.76)
axb 2.781⁎⁎⁎
(3.72)
axc 0.717⁎⁎⁎
(2.85)
axd 1.215⁎⁎⁎
(3.83)
axe 0.687⁎⁎
(2.27)
Power distance residual: b −2.397
(−1.21)
Collectivism residual: c −1.384
(−1.38)
Masculinity residual: d −1.943⁎
(−1.75)
Uncertainty avoidance residual: e −0.938
(−1.01)
Leverage 0.184⁎⁎ 0.187⁎ 0.178⁎ 0.159 0.178⁎
(1.87) (1.90) (1.81) (1.62) (1.80)
Log (total assets) −0.196⁎⁎⁎ −0.194⁎⁎⁎ −0.195⁎⁎⁎ −0.194⁎⁎⁎ −0.196⁎⁎⁎
(−10.69) (−10.72) (−10.59) (−10.56) (−10.66)
ROE 0.559⁎⁎⁎ 0.563⁎⁎⁎ 0.565⁎⁎⁎ 0.560⁎⁎⁎ 0.565⁎⁎⁎
(7.86) (7.87) (7.92) (7.89) (7.92)
Capital expenditure 0.054 0.064 0.043 0.043 0.049
(0.46) (0.54) (0.36) (0.37) (0.42)
R&D/total assets 0.039⁎⁎⁎ 0.038⁎⁎⁎ 0.038⁎⁎⁎ 0.038⁎⁎⁎ 0.038⁎⁎⁎
(4.89) (4.85) (4.84) (4.82) (4.81)
Log (GDP per capita) −1.063⁎⁎⁎ −0.918⁎ −0.715 −0.979⁎⁎⁎ −0.914⁎⁎⁎
(−3.60) (−1.74) (−1.57) (−3.23) (−2.64)
GDP growth volatility −0.003⁎ −0.003 −0.003 −0.003⁎ −0.003
(−1.71) (−1.59) (−1.49) (−1.78) (−1.48)
Governance indicators −0.092 −0.114 −0.128⁎ −0.120⁎ −0.119
(−1.40) (−1.56) (−1.71) (−1.85) (−1.46)
Intercept term Yes Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes
Robust standard errors Yes Yes Yes Yes Yes
R-squared 0.335 0.336 0.335 0.336 0.335
Number of observations 16,693 16,693 16,693 16,693 16,693
This table presents the estimation results from regressing Tobin's q on employee relation (ER) and its interaction terms with the residuals of Hofstede's cultural
dimensions over the period of 2002–2012. t-statistics appear in brackets and are based on robust standard errors used in a study by White (1980).
⁎⁎⁎ Denote statistical significance at the 1% level.
⁎⁎ Denote statistical significance at the 5% level.
⁎ Denotes statistical significance at the 10% level.
located in societies with high power distance, collectivism, masculinity, and uncertainty avoidance. The findings of the empirical
tests support our first, second, and sub-hypotheses.
4.2. Adjusting sample composition bias
The heterogeneity of the number of firm-year observations across 30 countries may influence the associations among ERR, its
interactive effects of cultural dimensions, and firm value. The weighted least squares (WLS) method addresses the potential prob-
lem of heterogeneity of observations and maximizes the efficiency of parameter estimation. This can be made possible by
attempting to give each data point its suitable amount of influence over the parameter estimates. Thus, in Table 4, we present
the results of the WLS regression, in which the inverse of the number of firm-year observations per country is used for the weight,
following Kim et al. (2015). Consistent with previous findings, the results reveal significant and positive relationships between
ERR and firm value in Models 1 to 5. We also find significant and positive relations between firm value and interaction terms
as follows: ERR × Power distance residual; ERR × Collectivism residual; ERR × Masculinity residual; and ERR × Uncertainty avoidance
residual. These results indicate that the improvement of ERR enhances firm value and that its marginal effect is greater in coun-
tries with higher power distance, stronger collectivism, greater masculinity and stronger risk avoidance, thus supporting our first,
second, and sub-hypotheses.
Table 4
Adjusting sample composition bias I: weighted least square (WLS).
Tobin’s q
(1) (2) (3) (4) (5)

(6.76) (6.79) (6.99) (5.78) (6.49)
axb 2.689⁎⁎⁎
(3.92)
axc 0.722⁎⁎⁎
(3.56)
axd 1.147⁎⁎⁎
(4.08)
axe 0.684⁎⁎⁎
(2.87)
Power distance residual: b -3.297⁎
(-1.78)
Collectivism residual: c -1.938⁎⁎
(-2.06)
Masculinity residual: d -2.081⁎⁎
(-2.02)
Uncertainty avoidance residual: e -1.319
(-1.51)
Leverage 0.122 0.121 0.114 0.104 0.115
(1.48) (1.48) (1.39) (1.27) (1.40)
Log (total assets) -0.200⁎⁎⁎ -0.197⁎⁎⁎ -0.198⁎⁎⁎ -0.197⁎⁎⁎ -0.199⁎⁎⁎
(-13.61) (-13.64) (-13.50) (-13.47) (-13.53)
ROE 0.480⁎⁎⁎ 0.484⁎⁎⁎ 0.486⁎⁎⁎ 0.482⁎⁎⁎ 0.486⁎⁎⁎
(8.78) (8.81) (8.87) (8.81) (8.87)
(0.82) (0.84) (0.71) (0.73) (0.76)
R&D/total assets 0.041⁎⁎⁎ 0.041⁎⁎⁎ 0.041⁎⁎⁎ 0.040⁎⁎⁎ 0.040⁎⁎⁎
(6.03) (6.00) (5.98) (5.96) (5.96)
Log (GDP per capita) -0.972⁎⁎⁎ -0.610 -0.408 -0.895⁎⁎⁎ -0.713⁎⁎⁎
(-3.55) (-1.23) (-0.95) (-3.19) (-2.18)
GDP growth volatility -0.001 -0.001 -0.001 -0.001 -0.001
(-0.89) (-0.55) (-0.44) (-0.71) (-0.46)
Governance indicators -0.010 -0.055 -0.077 -0.053 -0.064
(-0.18) (-0.82) (-1.12) (-0.93) (-0.83)
R-squared 0.345 0.346 0.346 0.346 0.346
This table presents weighted least square (WLS) results for 16,693 firm-year observations over the period of 2002–2012. t-statistics appear in brackets and are
based on robust standard errors used in a study by White (1980).
⁎ Denotes statistical significance at the10% level.
A possible concern with our analysis is that previous results could be mainly derived from U.S. firms, which account for a large
fraction of our sample. In Panel A of Table 5, we therefore re-conduct our baseline regression model in Eq. (1) after removing the
U.S. sample. The findings indicate that all of the ERR-firm values as well as the interaction terms (ERR × Hofstede's residual cultural
dimensions) and firm value associations remain qualitatively the same as those of our earlier findings. Thus, the robustness tests
indicate that our empirical results are not driven by U.S. firms.
As previously mentioned, it is reasonable to suppose that power distance and collectivism co-move closely with each other in
the same direction, which is also strongly supported by our Pearson correlation result (see footnote 2). Although the co-move-
ment between power distance and collectivism is quite obvious in most countries in our sample, the positive relationship be-
tween the two variables is relatively weak, though still positive, in five countries, specifically, Belgium, France, Japan, Poland,
and Spain. Thus, in Panel B of Table 5, we verify that our cross-country results do not change if we exclude firms in the five coun-
tries. We find that the results are unchanged across all of the ERR-firm values as well as the interaction terms firm value associ-
ations; however, excluding the five countries reduces our observations from 16,693 to 12,926.
4.3. Alternative independent variables
In this section, we re-estimate our tests by applying alternative measures of ERR to ensure that our findings are not sensitive
to alternative independent variables, including the equally weighted ERR index (i.e., EW employee relation) and the first principal
Table 5
Adjusting sample composition bias II.
Panel A. Except U.S. sample.
Tobin's q
(1) (2) (3) (4) (5)
Employee relation: a 0.313⁎⁎⁎ 0.284⁎⁎⁎ 0.223⁎ 0.263⁎⁎ 0.248⁎

(2.96) (2.72) (1.65) (2.40) (1.95)
axb 2.604⁎⁎⁎
(3.43)
axc 0.813⁎
(1.87)
axd 1.152⁎⁎⁎
(3.56)
axe 0.665⁎
(1.71)
(−0.36)
(−0.34)
Masculinity residual: d −1.928
(−1.44)
Uncertainty avoidance residual: e 0.028
(0.03)
Leverage 0.478⁎⁎⁎ 0.480⁎⁎⁎ 0.473⁎⁎⁎ 0.441⁎⁎⁎ 0.466⁎⁎⁎
(3.12) (3.11) (3.07) (2.87) (3.01)
Log (total assets) −0.180⁎⁎⁎ −0.176⁎⁎⁎ −0.177⁎⁎⁎ −0.176⁎⁎⁎ −0.178⁎⁎⁎
(−6.18) (−6.15) (−6.03) (−6.05) (−6.14)
ROE 0.679⁎⁎⁎ 0.681⁎⁎⁎ 0.680⁎⁎⁎ 0.681⁎⁎⁎ 0.681⁎⁎⁎
(5.13) (5.13) (5.13) (5.16) (5.13)
Capital expenditure −0.123 −0.093 −0.138 −0.142 −0.131
(−0.53) (−0.41) (−0.60) (−0.61) (−0.57)
R&D/total assets 0.019 0.018 0.019 0.018 0.018
(1.49) (1.42) (1.45) (1.42) (1.41)
Log (GDP per capita) −0.712⁎⁎⁎ −0.906 −0.764 −0.569⁎ −0.823⁎⁎
(−2.69) (−1.59) (−1.63) (−1.86) (−2.45)
GDP growth volatility −0.001 −0.001 −0.001 −0.001 −0.001
(−0.35) (−0.41) (−0.35) (−0.51) (−0.35)
Governance indicators −0.217⁎⁎ −0.221⁎⁎ −0.224⁎⁎ −0.204⁎⁎ −0.219⁎⁎
(−2.28) (−2.32) (−2.33) (−1.97) (−2.26)
R-squared 0.331 0.333 0.332 0.333 0.332
Panel B. Except Belgium, France, Japan, Poland, and Spain samples.
Tobin's q
(1) (2) (3) (4) (5)

(4.88) (5.33) (5.08) (5.71) (5.52)
axb 4.884⁎⁎⁎
(3.69)
axc 0.778⁎⁎
(2.08)
axd 2.238⁎⁎⁎
(3.61)
axe 1.249⁎
(1.90)
(−1.09)
(−0.73)
(−1.53)
(−1.04)
Table 5 (continued)
Panel B. Except Belgium, France, Japan, Poland, and Spain samples.
Tobin's q
(1) (2) (3) (4) (5)
Leverage −0.088 −0.072 −0.084 −0.095 −0.083

(−0.70) (−0.58) (−0.67) (−0.76) (−0.66)
Log (total assets) −0.238⁎⁎⁎ −0.231⁎⁎⁎ −0.237⁎⁎⁎ −0.238⁎⁎⁎ −0.237⁎⁎⁎
(−10.79) (−10.85) (−10.79) (−10.84) (−10.87)
ROE 0.572⁎⁎⁎ 0.569⁎⁎⁎ 0.576⁎⁎⁎ 0.568⁎⁎⁎ 0.577⁎⁎⁎
(7.50) (7.53) (7.52) (7.49) (7.52)
(0.93) (1.03) (0.90) (0.97) (0.93)
R&D/total assets 0.042⁎⁎⁎ 0.043⁎⁎⁎ 0.042⁎⁎⁎ 0.042⁎⁎⁎ 0.042⁎⁎⁎
(4.42) (4.53) (4.44) (4.47) (4.41)
Log (GDP per capita) −1.332⁎⁎⁎ −1.360⁎⁎ −1.190⁎⁎ −1.240⁎⁎⁎ −1.205⁎⁎⁎
(−3.87) (−2.16) (−2.24) (−3.60) (−3.23)
GDP growth volatility −0.013⁎⁎⁎ −0.013⁎⁎⁎ −0.013⁎⁎⁎ −0.013⁎⁎⁎ −0.012⁎⁎⁎
(−4.39) (−4.39) (−4.35) (−4.52) (−4.22)
Governance indicators −0.417⁎⁎⁎ −0.444⁎⁎⁎ −0.428⁎⁎⁎ −0.437⁎⁎⁎ −0.437⁎⁎⁎
(−4.26) (−4.35) (−4.16) (−4.49) (−4.02)
R-squared 0.341 0.343 0.341 0.343 0.341
Panels A and B present robustness tests for alleviating the concern of sample composition bias from regressing Tobin's q on employee relation (ER) and its inter-
action terms with the residuals of Hofstede's cultural dimensions. t-statistics appear in brackets and are based on robust standard errors used in a study by White
(1980).
component of the ERR index (i.e., PCA employee relation). As mentioned earlier, the EW ERR is defined as the equal weighting of
the (mostly) employee-related (five) sub-social indexes, namely, (a) employment quality index, (b) training and development
index, (c) health and safety index, (d) diversity index, and (e) human rights index. Consistent with the earlier findings, Table 6
indicates that all coefficients of EW ERR and its interaction terms with the residuals of Hofstede's cultural dimensions are positive
and statistically significant at the 1% level.
We also repeat our analysis using the PCA ERR instead of the (original) ERR index, which is defined as the principal compo-
nents of the five categories of employment quality, training and development, health and safety, diversity, and human rights. Abdi
and Williams (2010) argue that the PCA extracts critical information from data in which observations are inter-correlated by
quantitative variables. Table 7 presents the regression results based on the alternative measure (i.e., PCA employee relation) of
our key independent variable. Our results also indicate that the coefficients of the PCA ERR and its interaction terms with the re-
siduals of Hofstede's cultural dimensions are significant and positive.
Tables 6 and 7 indicate that the ERR effect combined with the effect of national cultural dimensions on firm value is stronger
with larger coefficients of key independent variables than the coefficients in Tables 3, 4, and 5, which reflect the values when
using the EW ERR index or the PCA ERR index. It is reasonable to expect our results to be stronger when we use the key employee
sub-five indexes as alternative ERR indexes. The evidence supports our hypotheses that a firm's concentrated effort to improve
relations with employees would increase its value and that the positive relationship between employee relation responsibility
and firm value would be strengthened in countries with greater power distance, stronger collectivism, stronger masculinity,
and stronger risk-avoidance cultures.
4.4. Endogeneity concerns
Endogeneity is unlikely to be a concern for the Hofstede's cultural dimensions in our study. Eun et al. (2015) argue that a re-
verse causality of the cultural dimensions seems implausible because it is highly improbable that firm value changes the country's
cultural traits. In addition, we also control for several country-level variables such as log GDP per capita, GDP growth volatility,
governance indicators, and country-fixed effects following Stulz and Williamson (2003) and Eun et al. (2015). Thus, it is difficult
to identify possible omitted variables that are more exogenous than culture, which can affect firm value. However, a potential crit-
icism of the baseline regressions is that the ERR index might not be exogenously determined. For example, it might happen that
firms with high levels of value tend to have a better ERR, which creates a reverse causality.
Table 6
Alternative independent variable I: equally weighted employee relation.
Tobin's q
(1) (2) (3) (4) (5)
EW employee relation: a⁎ 0.747⁎⁎⁎ 0.787⁎⁎⁎ 0.779⁎⁎⁎ 0.666⁎⁎⁎ 0.732⁎⁎⁎

(4.64) (4.75) (4.85) (4.10) (4.54)
a*xb 7.851⁎⁎⁎
(4.03)
a*xc 1.933⁎⁎⁎
(2.93)
a*xd 4.612⁎⁎⁎
(5.10)
a*xe 2.532⁎⁎⁎
(3.25)
Power distance residual: b −4.704⁎⁎
(−2.10)
Collectivism residual: c −1.925⁎
(−1.85)
Masculinity residual: d −3.537⁎⁎⁎
(−2.80)
Uncertainty avoidance residual: e −1.852⁎
(−1.72)
Leverage 0.187⁎ 0.177⁎ 0.178⁎ 0.158 0.170⁎
(1.90) (1.80) (1.80) (1.60) (1.71)
Log (total assets) −0.181⁎⁎⁎ −0.180⁎⁎⁎ −0.182⁎⁎⁎ −0.179⁎⁎⁎ −0.182⁎⁎⁎
(−10.44) (−10.46) (−10.53) (−10.36) (−10.65)
ROE 0.565⁎⁎⁎ 0.570⁎⁎⁎ 0.570⁎⁎⁎ 0.565⁎⁎⁎ 0.572⁎⁎⁎
(7.95) (7.96) (7.99) (7.96) (8.01)
(0.31) (0.43) (0.27) (0.23) (0.30)
R&D/total assets 0.040⁎⁎⁎ 0.040⁎⁎⁎ 0.040⁎⁎⁎ 0.039⁎⁎⁎ 0.039⁎⁎⁎
(5.13) (5.06) (5.04) (5.02) (4.98)
Log (GDP per capita) −1.115⁎⁎⁎ −0.982⁎ −0.779⁎ −0.956⁎⁎⁎ −0.978⁎⁎⁎
(−3.79) (−1.86) (−1.71) (−3.16) (−2.82)
GDP growth volatility −0.003 −0.003 −0.002 −0.003⁎ −0.002
(−1.63) (−1.48) (−1.41) (−1.95) (−1.34)
Governance indicators −0.088 −0.110 −0.122 −0.124⁎ −0.115
(−1.32) (−1.51) (−1.62) (−1.89) (−1.41)
R-squared 0.334 0.335 0.335 0.336 0.335
This table reports robustness tests by applying alternative measure of employee relation, EW employee relation, for 16,693 firm-year observations over the period
of 2002–2012. t-statistics appear in brackets and are based on robust standard errors used in a study by White (1980).
4.4.1. Two-stage least squares and dynamic system GMM

To mitigate the endogeneity concern, in this section, we re-estimate our earlier analysis using two approaches, the two-stage least
squares (2SLS) and the dynamic system GMM. First, we perform a two-stage least squares (2SLS) approach and present the results in
Table 8. We construct the instrumental variables (IVs), which include the initial ERR score recorded when the firm enters the sample,
the industry average of the ERR score in the first year of data, and a dummy variable taking the value 1 if the previous year's earnings
represent a loss, similar to Elsas et al. (2010), Ferreira et al. (2011), El Ghoul et al. (2011), and Cai et al. (2015). Although lagged var-
iables are not fully exogenous, using lagged variables, such as the initial ERR score and industry average ERR score in the first year of
data, is a common procedure in econometrics for instrumental variable methods because these variables are set before determining
firm value, but are usually highly correlated with an endogenous variable (see Elsas et al. 2010). El Ghoul et al. (2011) further use a
negative earning dummy variable as an instrument variable because the investment in ERR (and/or CSR) can be negatively affected by
negative earnings in the previous year.7 In Table 8, we present the results of the F-tests and Sargan's over-identification tests to con-
firm the robustness of our instruments. According to the F-tests, the null hypothesis that instrument variables can be excluded from
the first-stage regressions is strongly rejected, indicating that our instruments are not weak. The p-values of Sargan's over-identifica-
tion tests range from 0.142 to 0.165, suggesting that our instruments are valid as they are not related to the residual error term. The
7
In (untabulated) Pearson correlation tests, we confirm that our lagged variables are highly correlated with the ERR index and that the previous year's negative earn-
ings are negatively correlated with one endogenous variable.
Table 7
Alternative independent variable II: principal components analysis.
Tobin's q
(1) (2) (3) (4) (5)
PCA employee relation: a⁎⁎ 0.454⁎⁎⁎ 0.483⁎⁎⁎ 0.478⁎⁎⁎ 0.411⁎⁎⁎ 0.451⁎⁎⁎

(4.83) (4.94) (5.08) (4.34) (4.82)
a**xb 4.518⁎⁎⁎
(4.00)
a**xc 1.155⁎⁎⁎
(2.93)
a**xd 2.758⁎⁎⁎
(5.14)
a**xe 1.512⁎⁎⁎
(3.29)
(−0.44)
(−1.00)
(−1.21)
(−0.70)
Leverage 0.188⁎ 0.179⁎ 0.180⁎ 0.160 0.172⁎
(1.91) (1.82) (1.81) (1.62) (1.73)
Log (total assets) −0.181⁎⁎⁎ −0.181⁎⁎⁎ −0.183⁎⁎⁎ −0.179⁎⁎⁎ −0.183⁎⁎⁎
(−10.48) (−10.50) (−10.56) (−10.41) (−10.70)
ROE 0.565⁎⁎⁎ 0.569⁎⁎⁎ 0.569⁎⁎⁎ 0.564⁎⁎⁎ 0.571⁎⁎⁎
(7.95) (7.96) (7.99) (7.96) (8.01)
(0.30) (0.42) (0.27) (0.22) (0.29)
R&D/total assets 0.040⁎⁎⁎ 0.040⁎⁎⁎ 0.040⁎⁎⁎ 0.039⁎⁎⁎ 0.039⁎⁎⁎
(5.13) (5.06) (5.04) (5.02) (4.98)
Log (GDP per capita) −1.116⁎⁎⁎ −0.979⁎ −0.778⁎ −0.960⁎⁎⁎ −0.978⁎⁎⁎
(−3.79) (−1.85) (−1.70) (−3.17) (−2.82)
GDP growth volatility −0.003 −0.003 −0.002 −0.003⁎ −0.002
(−1.62) (−1.48) (−1.41) (−1.94) (−1.33)
Governance indicators −0.088 −0.110 −0.122 −0.125⁎ −0.116
(−1.33) (−1.51) (−1.63) (−1.91) (−1.42)
R-squared 0.334 0.336 0.335 0.336 0.335
This table reports principal components analysis (PCA) results for 16,693 firm-year observations over the period of 2002–2012. t-statistics appear in brackets and
are based on robust standard errors used in a study by White (1980).
⁎ Denote statistical significance at the 10% levels, respectively.
2SLS results reveal that the employee relation responsibility and all of its interactive effects of cultural dimensions are strongly signif-
icant and positive throughout, thus supporting the first, second, and sub-hypotheses.
To further address the endogeneity concerns in our analysis, we perform the dynamic system GMM estimator following
Blundell and Bond (1998) and Wintoki et al. (2012) and present the results in Table 9. Blundell and Bond (1998) argue that
the dynamic system GMM improves the efficiency of the estimator by mitigating endogeneity issues from the reverse causality
and time-invariant omitted variables and autocorrelations between the main variables and the unobserved heterogeneity in the
panel data by combining the moment conditions of the first differencing and the level GMM estimators.8
In Table 9, to verify the validity of our instruments, we perform the following two specification tests: the second-order serial
correlation test (i.e., AR (2)) and the Hansen J test of over-identification. The p-values of the AR (2) range from 0.105 to 0.121,
suggesting that the null hypothesis that there is no second-order serial correlation cannot be rejected. In addition, the p-values
of the Hansen J test range from 0.103 to 0.130. Therefore, we do not reject the null hypothesis that the instruments are uncorre-
lated with the residuals. We further report the results of a difference-in-Hansen test of exogeneity, as suggested by Eichenbaum et
al. (1988) and Wintoki et al. (2012).9 Our results indicate that the p-values of the difference-in-Hansen test of exogeneity range
8
Blundell and Bond (1998) argue that the estimators of Arellano and Bond (1991) can be biased when the ratio of the variance of the panel-level effect divided by the
variance of idiosyncratic error is high or the autoregressive parameters are large.
9
A difference-in-Hansen test of exogeneity yields a J-statistic, and the null hypothesis is that the subsets of instruments in the level equations are exogenous.
Table 8
Mitigating endogeneity problem: two-stage least squares (2SLS).
Tobin's q
(1) (2) (3) (4) (5)

(3.54) (3.36) (3.27) (3.30) (3.18)
axb 2.861⁎⁎⁎
(5.63)
axc −2.544⁎⁎⁎
(−3.20)
axd 0.753⁎⁎⁎
(2.92)
axe −1.456⁎⁎⁎
(−3.64)
Power distance residual: b 1.208⁎⁎⁎
(5.11)
Collectivism residual: c −1.994⁎⁎⁎
(−4.85)
Masculinity residual: d 0.715⁎⁎⁎
(3.13)
Uncertainty avoidance residual: e −0.994⁎⁎⁎
(−3.22)
Leverage 0.198⁎⁎ 0.201⁎⁎ 0.192⁎⁎ 0.174⁎⁎ 0.191⁎⁎
(2.30) (2.35) (2.23) (2.02) (2.23)
Log (total assets) −0.194⁎⁎⁎ −0.191⁎⁎⁎ −0.192⁎⁎⁎ −0.193⁎⁎⁎ −0.193⁎⁎⁎
(−11.93) (−11.73) (−11.71) (−11.83) (−11.81)
ROE 0.559⁎⁎⁎ 0.564⁎⁎⁎ 0.565⁎⁎⁎ 0.560⁎⁎⁎ 0.566⁎⁎⁎
(11.94) (12.06) (12.08) (11.98) (12.08)
(0.52) (0.63) (0.40) (0.43) (0.47)
R&D/total assets 0.039⁎⁎⁎ 0.038⁎⁎⁎ 0.038⁎⁎⁎ 0.038⁎⁎⁎ 0.038⁎⁎⁎
(7.03) (6.96) (6.97) (6.88) (6.88)
Log (GDP per capita) −1.069⁎⁎⁎ −0.904⁎⁎⁎ −0.704⁎⁎⁎ −0.982⁎⁎⁎ −0.908⁎⁎⁎
(−4.72) (−3.25) (−2.65) (−4.33) (−3.79)
GDP growth volatility −0.003⁎ −0.003⁎ −0.003 −0.003⁎ −0.003⁎
(−1.88) (−1.69) (−1.63) (−1.81) (−1.69)
Governance indicators −0.090 −0.113⁎⁎ −0.128⁎⁎ −0.118⁎⁎ −0.118⁎⁎
(−1.62) (−1.99) (−2.24) (−2.12) (−2.07)
F-test of instruments (p-value) 0.000 0.000 0.000 0.000 0.000
Sargan overidentification test 3.660 3.805 3.607 3.903 3.672
(p-value) 0.160 0.149 0.165 0.142 0.159
R-squared 0.326 0.328 0.327 0.328 0.327
This table shows the robustness results for mitigating endogeneity problem using two-stage least squares (2SLS). t-statistics appear in brackets.
from 0.435 to 0.656, suggesting that we cannot reject the null hypothesis that the additional subset of instruments is exogenous.
These specification tests confirm the validity of our instruments, and we find a significant positive association between ERR and
firm value. Our results further support the preservation of the previous results with interactive effects of cultural dimensions and
the ERR index on firm value. Taken together, the results in Tables 8 and 9 further support our arguments regarding the positive
effects of employee relation responsibility on firm value and the combined effect of cultural differences-ERR and firm value.
4.4.2. Granger causality tests

To alleviate the concern regarding the reverse causality between firm value and ERR, we perform Granger causality tests to
determine whether a significant bi-directional causal relationship is present between two variables and present the results in
Table 10. The 1-, 2-, and 3-year lagged Tobin's q and employee relation variables, including EW ERR and PCA ERR, are used to
estimate the model, an approach that is similar to that of Kim et al. (2015). In Models 1 and 3 of Table 10, we find positive
and significant relationships between ERR (and/or EW ERR and PCA ERR) and firm value when the 2-year lagged ERR variables
are used as explanatory variables and Tobin's q is used as a dependent variable. On the contrary, our results reveal insignificant
relationships between ERR (and/or EW ERR and PCA ERR) and firm value in Models 2 and 4 when the 1-, 2-, and 3-year lagged
Tobin's q variables are used as explanatory variables and ERR is used as a dependent variable. The findings of our empirical tests
suggest that there is a positive and unidirectional Granger causality between ERR and firm value, suggesting a lower probability of
Table 9
Mitigating endogeneity problem: dynamic system generalized method of moments.
Tobin's q
(1) (2) (3) (4) (5)
Employee relation: a 0.863⁎⁎ 0.775⁎⁎ 0.731⁎⁎ 0.814⁎⁎ 0.814⁎⁎

(2.31) (2.24) (2.33) (2.26) (2.38)
axb 0.696⁎
(1.89)
axc 0.448⁎⁎
(2.04)
axd 0.376⁎⁎
(2.23)
axe 0.311⁎
(1.88)
(−1.48)
Collectivism residual: c −0.552⁎
(−1.66)
Masculinity residual: d −0.899⁎⁎⁎
(−3.64)
Uncertainty avoidance residual: e −0.412⁎⁎
(−2.24)
Tobin's Qt-1 −0.015 −0.013 −0.015 −0.015 −0.014
(−1.43) (−1.13) (−1.35) (−1.32) (−1.28)
Leverage 0.223 0.089 0.180 0.199 0.191
(1.61) (1.02) (1.37) (1.50) (1.44)
Log (total assets) −0.593⁎⁎ −0.605⁎⁎ −0.521⁎⁎ −0.564⁎⁎ −0.546⁎⁎
(−2.20) (−2.21) (−1.99) (−2.08) (−2.04)
ROE 0.348 0.448⁎⁎ 0.406⁎⁎ 0.431⁎⁎ 0.422⁎⁎
(1.59) (2.04) (2.09) (2.10) (2.05)
Capital expenditure −0.065⁎ −0.056 −0.053 −0.055 −0.057⁎
(−1.81) (−1.62) (−1.61) (−1.62) (−1.65)
R&D/total assets −0.095⁎⁎⁎ −0.075⁎ −0.080⁎⁎ −0.076⁎⁎ −0.083⁎⁎
(−2.65) (−1.87) (−2.15) (−2.05) (−2.22)
Log (GDP per capita) −0.269 0.806 0.195 0.144 0.139
(−0.57) (1.33) (0.98) (1.37) (1.17)
GDP growth volatility 0.002 0.001 0.001⁎⁎ 0.001⁎⁎⁎ 0.001⁎⁎⁎
(1.53) (0.69) (2.54) (3.01) (2.80)
Governance indicators 0.072 0.067 0.086 0.080 0.086
(1.03) (0.90) (0.87) (0.92) (0.91)
AR(1) test 0.000 0.000 0.000 0.000 0.000
AR(2) test 0.121 0.107 0.105 0.113 0.106
Hansen test of overidentification 0.130 0.106 0.111 0.103 0.118
Diff-in-Hansen test of exogeneity 0.527 0.435 0.601 0.471 0.656
This table shows the robustness results for mitigating endogeneity problem using dynamic system generalized method of moments (GMM). The AR(1) and AR(2)
tests are tests for first-order and second-order serial correlation in the first differenced residuals. The null hypothesis is no serial correlation. The Hansen test of
over-identifying restrictions is a test with the joint null hypothesis that instrumental variables are valid, i.e., uncorrelated with error terms. The difference-in-
Hansen test of erogeneity is a test with the null hypothesis that the subsets of instruments that we use in the levels equation are exogenous. Robust z-statistics
are presented.
reverse causality between the two variables and indicating that the problem of reverse causality is not a serious factor in our
analysis.
5. Conclusion
In this paper, our research interests lie in the association between companies’ investments in the social responsibility of stake-
holder relationships with employees and firm value. Our study distinguishes employee relation responsibility, a sub-category of
CSR, from other related activities and examines an empirical analysis that links it to firm value by taking into account a compre-
hensive list of employee relation responsibilities, thus providing an ERR score in diverse areas at the firm level across countries.
Our results indicate that ERR is significantly and positively associated with firm value and that this significant and positive rela-
tionship is more pronounced when ERR is combined with four national cultural dimensions. Our results are robust even after mit-
igating endogeneity issues from reverse causality and time-invariant omitted variables using 2SLS and dynamic system GMM as
well as adjusting for sample composition bias and using alternative independent variables.
Table 10
Granger causality tests.
Tobin's qt Employee relationt Tobin's qt EW employee relationt Tobin's qt PCA employee relationt
(1) (2) (3) (4)
Tobin's qt-1 −0.007 0.001 −0.024⁎⁎ 0.001 −0.024⁎⁎ 0.001

(−0.07) (0.28) (−2.06) (0.32) (−2.07) (0.26)
Tobin's qt-2 0.099 0.001 0.067⁎⁎⁎ 0.001 0.067⁎⁎⁎ 0.001
(1.01) (0.71) (5.84) (0.87) (5.83) (0.43)
Tobin's qt-3 0.187⁎⁎ 0.001 0.258⁎⁎⁎ 0.001 0.258⁎⁎⁎ 0.001
(2.28) (0.55) (26.97) (0.95) (26.97) (0.93)
Employee relationt-1 0.005 0.676⁎⁎⁎
(0.06) (58.50)
Employee relationt-2 0.193⁎⁎ 0.133⁎⁎⁎
(2.09) (10.30)
Employee relationt-3 0.016 0.016
(0.15) (1.61)
EW employee relationt-1 −0.003 1.591⁎⁎⁎
(−0.01) (72.33)
EW employee relationt-2 0.900⁎⁎ 0.179⁎⁎⁎
(2.01) (6.32)
EW employee relationt-3 −0.507 0.166⁎⁎⁎
(−1.45) (7.14)
PCA employee relationt-1 0.036 0.937⁎⁎⁎
(0.17) (73.25)
PCA employee relationt-2 0.520⁎⁎ 0.109⁎⁎⁎
(1.96) (6.59)
PCA employee relationt-3 −0.331 0.086⁎⁎⁎
(−1.59) (6.36)
Leverage 0.197⁎⁎ −0.009 0.167⁎ −0.009⁎ 0.167⁎ −0.009
(2.32) (−0.92) (1.93) (−1.70) (1.92) (−1.64)
Log (total assets) −0.064⁎⁎⁎ 0.015⁎⁎⁎ −0.053⁎⁎⁎ −0.001 −0.053⁎⁎⁎ 0.001
(−3.93) (10.60) (−4.16) (−1.42) (−4.16) (0.52)
ROE 0.194⁎⁎⁎ 0.015⁎⁎⁎ 0.192⁎⁎⁎ 0.009⁎⁎⁎ 0.192⁎⁎⁎ 0.010⁎⁎⁎
(3.09) (2.95) (4.15) (3.04) (4.15) (3.41)
Capital expenditure −0.217⁎⁎⁎ −0.015 −0.252⁎⁎ −0.004 −0.254⁎⁎ −0.009
(−3.12) (−1.26) (−2.19) (−0.59) (−2.21) (−1.41)
R&D/total assets 0.011⁎⁎ 0.002⁎⁎⁎ 0.011⁎ 0.001⁎ 0.011⁎ 0.001⁎⁎
(1.97) (3.16) (1.92) (1.74) (1.92) (2.34)
Log (GDP per capita) −0.142 −0.046⁎ −0.009 0.013 −0.010 0.011
(−0.74) (−1.66) (−0.04) (0.83) (−0.04) (0.72)
GDP growth volatility (5 years) 0.008⁎⁎⁎ −0.001 0.007⁎⁎⁎ 0.001 0.007⁎⁎⁎ 0.001
(5.16) (−0.48) (4.56) (0.59) (4.56) (0.50)
Governance indicators 0.165⁎⁎ −0.043⁎⁎⁎ 0.237⁎⁎⁎ −0.008 0.236⁎⁎⁎ −0.011⁎⁎
(1.99) (−4.67) (3.36) (−1.57) (3.34) (−2.27)
Intercept term Yes Yes Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes Yes
Robust standard errors Yes Yes Yes Yes Yes Yes
R-squared 0.436 0.809 0.401 0.890 0.401 0.890
Number of observations 9,586 9,586 9,586 9,586 9,586 9,586
This table reports the results of Granger causality tests for 16,693 firm-year observations over the period of 2002–2012. The 1-, 2-, and 3-year lagged Tobin's q,
employee relation, EW employee relation, PCA employee relation variables are used to estimate the model. The figures are in bold type if Granger causality test
is statistically significant at the 5% level or lower. t-statistics appear in brackets and are based on robust standard errors used in a study by White (1980).
Our finding confirms the stakeholder maximization perspective that CSR activities positively impact shareholder wealth (Deng
et al. 2013). Greater effects of ERR on firm value in cultures with greater power distance, stronger collectivism, greater masculin-
ity, and stronger risk avoidance indicate that when a company increases its investment in ERR in these types of cultures, its mar-
ginal effect on the firm value per unit cost of investment is greater than it is in other cultures. A company that invests in ERR in
these cultures benefits by improving its reputation and by attracting and retaining high quality, capable employees who are eager
to join a company that promotes employee relationships in cultures that are characterized as autocratic, group oriented, highly
competitive, and risk averse to investing in CSR. Our results provide evidence that cultural dimensions affect and reinforce the
positive relationship between ERR and firm value.
We offer critical contributions that have implications for CSR and related finance researchers. First, our research indicates that
the CSR variable in the analysis with respect to its link to firm value can be elaborated by more in-depth investigation into its sub-
categories, in particular, a company's relationship with its stakeholders (i.e., employees). CSR is composed of varied dimensions,
each of which may have different impacts on firm value. The indicators that measured CSR tend to be aggregated overall to de-
termine the total quantity of CSR activity in the empirical analysis. However, as a company may have different interests in each
CSR stakeholder relationship, when we separate CSR into different dimensions with the characteristics of each dimension, we not
only improve the explanatory power for CSR and its effect on firm value, but we also obtain a better understanding of the mech-
anism and procedure by which CSR activity in a sub-category can result in an increase or a decrease in firm value.
Second, our analysis brings attention to the importance of the careful selection of a relevant variable that can strengthen the
relation between CSR and firm value. Though previous studies examine relationships between these two constructs, they mainly
attempt to identify the direct impact of CSR-related variables on firm value. There is scant research that seeks to identify the com-
bined effects of CSR and another variable on the increase or decrease of firm value. This study is, to the best of our knowledge, the
first attempt to investigate the role of cultural dimensions in the relation between employee relation responsibility and firm value.
Thus, we contend that further research must use different variables that can be combined with CSR measures to estimate the in-
teraction effect on firm value and that the use of cultural dimensions in this paper has contributed to expanding CSR research.
Third, this study suggests an improved econometric methodology in consideration of residual values of independent variables
when they are highly correlated with another variable. In our case, cultural dimensions are strongly correlated with the logarithm
of the GDP, thus raising concern related to serious multicollinearity. However, by converting cultural dimension values into resid-
uals, we investigate the combined effects of cultural dimensions and employee relationships on firm value without causing biased
results from problems of multicollinearity. This is another contribution of our research to academia as it offers a better under-
standing of the relationship between CSR measures and firm value.
Despite the important findings of this paper, the study also has some limitations. First, the combined effect of national culture
and CSR (including employee relation responsibility) on firm value can be affected by other country-level factors, such as the reg-
ulatory enforcement environment. Therefore, as in prior studies, we use various country-level control variables, including country
fixed effects, governance indicators, log (GDP per capita), and GDP growth volatility. However, there is still a possibility that other
formal and informal institutional factors affect the combined effect. Therefore, future research should consider the problem by
controlling for other institutional variables. Second, although Hofstede's cultural dimensions provide the most widely used data
to understand national cultural differences, the data are, as mentioned previously, subject to concern due to the lack of nationally
representative samples given that the dimensions are obtained from a specific company (i.e., IBM). Williamson (2002) contradicts
the concern of representativeness and argues that Hofstede's model can effectively explain national cultural differences because
organizational cultures reflect the national cultures. Nonetheless, it would benefit future studies to use other cultural variables,
such as global leadership and organizational behavior effectiveness (GLOBE), for their robustness tests.
Appendix A. Variable description
Variable Description Source
Employee relation The social index, among ESG indexes (i.e., environmental, social, and corporate Thomson Reuters ASSET4
governance), is used as the measure of employee relation, which is aimed to measure
the quality of relation between a firm and its employees.
EW employee relation Equally weighted employee relation index is defined as the equal weighting of the Authors' calculations based on
mostly employee-related (five) sub-social indexes: (a) employment quality index, (b) Thomson Reuters ASSET4
training and development index, (c) health and safety index, (d) diversity index, and
(e) human rights index.
PCA employee relation The first principal component of employee relation index is defined as the principal Authors' calculations based on
components of five categories: employment quality index, training and development Thomson Reuters ASSET4
index, health and safety index, diversity index, and human rights index.
Power distance Power distance is defined as “the extent to which the members of institutions and Hofstede Centre
organizations within a country expect and accept that power is distributed unequally”
(Hofstede 1997). A perfect score on power distance is 100 points. In high
power-distance societies, individuals admit the inequality of power and differences
between superiors and subordinates, are unwilling to disagree with superiors when
they are asked to follow some specific rules and believe that superiors are eligible for
special privileges (Hofstede 1983). In contrast, in low power-distance societies,
individuals are less likely to tolerate the class distinction and are not afraid to speak up
when they disagree with superiors.
Collectivism/individualism Collectivism/individualism “describes the relationship between the collectivity and Hofstede Centre
the individual that prevails in a given society” (Hofstede 1980). A perfect score on
collectivism/individualism is 100 points. “Collectivism places more importance on
interests of the group over those of individuals, emphasizing harmony and closeness
among the group members, while on the other hand, individualism pertains to
societies in which the ties between individuals are loose; everyone is expected to look
after himself or herself and his or her immediate family” (Hofstede 1997). In
collectivistic societies, a person considers her/himself as a part of a group and values
reciprocation of favors, a sense of belonging, and respect for tradition (Schwartz
1994). In individualistic societies, people tend to value personal time and freedom
(Hofstede 1984), pursue independence and pleasure (Schwartz 1994), and seek to
accomplish their personal goals.
(continued on next page)

(continued)
Variable Description Source
Masculinity/femininity Masculinity/femininity dimension refers to clearly differentiated social gender roles. A Hofstede Centre
perfect score on masculinity/femininity is 100 points. Masculinity is defined as “a
preference for achievement, heroism, assertiveness, and material success” (Hofstede
1984). Individuals in masculine societies are supposed to be assertive, aggressive,
ambitious, competitive, and success-oriented, while those in feminine societies are
characterized as tender, humble, caring, benevolent, and relationship-oriented
(Hofstede 1984).
Uncertainty avoidance Uncertainty avoidance pertains to “the extent to which the members of a culture feel Hofstede Centre
threatened by uncertain and unknown situation” (Hofstede 1997). A perfect score on
uncertainty avoidance is 100 points. People deal with uncertainty through different
means by resorting to technology, laws, and religions, and the tolerance for
uncertainty can vary culture by culture. Individuals in the culture with high
uncertainty are risk-averse, resist changes, place a premium on job security, favor
written rules, and are intolerant of deviations from standard practices in contrast to
those in the culture with low uncertainty avoidance (Hofstede 1984).
Tobin's q It is widely used as a measure of firm value and estimated as (book value of S&P Capital IQ
assets + market value of equity − book value of equity) / (book value of assets).
Leverage The ratio of book value of debt divided by total assets. S&P Capital IQ
Log (total assets) Defined as the logarithm of total assets. S&P Capital IQ
ROE Estimated as net income divided by the equity. S&P Capital IQ
Capital expenditure The ratio of capital expenditure expense to total sales. S&P Capital IQ
R&D/total assets Defined as the ratio of R&D expense divided by the total assets. S&P Capital IQ
Log (GDP per capita) Used as a measure of economic development and estimated as the logarithm of World Bank
average of the yearly GDP per capita for each country.
GDP growth volatility Used as a measure of GDP growth volatility and estimated as the standard deviation of World Bank
growth in GDP per capita for five years (Eun et al. 2015)
Governance indicators Used to measure a country's governance system similar to that of Morck et al. (2000) World Bank
and estimated as the sum of six indexes from Kaufmann et al. (2009). These indexes
measure (i) voice and accountability, (ii) political stability and absence of
violence/terrorism, (iii) government effectiveness, (iv) regulatory quality, (v) rule of
law, and (vi) control of corruption.
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Paciﬁc-Basin Finance Journal 40 (2016) 191–209

Contents lists available at ScienceDirect

Paciﬁc-Basin Finance Journal

Do employee relation responsibility and culture matter for ﬁrm

2. Literature review and hypothesis development

2.1. CSR, employee relation responsibility (ERR), and ﬁrm value

3.1. Sample construction

3.2. Employee relation responsibility (ERR)

3.3. Hofstede's cultural dimensions

Variable Obs. Mean Median Standard deviation P(0.25) P(0.75)

Employee relation 16,693 54.243 56.600 30.374 24.970 83.910

3.4. Residuals of Hofstede's cultural dimensions

Log (GDP per capita)

2012 2011 2010

Power distance −0.747 (0.000) −0.709 (0.000) −0.703 (0.000)

Panel B. Correlations between Hofstede variables

Power distance Collectivism Masculinity

3.5. Empirical model and variable

4.1. Multivariate analysis

(1) (2) (3) (4) (5)

Employee relation: a 0.365⁎⁎⁎ 0.355⁎⁎⁎ 0.349⁎⁎⁎ 0.331⁎⁎⁎ 0.342⁎⁎⁎

4.2. Adjusting sample composition bias

(1) (2) (3) (4) (5)

Employee relation: a 0.349⁎⁎⁎ 0.349⁎⁎⁎ 0.358⁎⁎⁎ 0.312⁎⁎⁎ 0.341⁎⁎⁎

4.3. Alternative independent variables

Panel A. Except U.S. sample.

(1) (2) (3) (4) (5)

Employee relation: a 0.313⁎⁎⁎ 0.284⁎⁎⁎ 0.223⁎ 0.263⁎⁎ 0.248⁎

Panel B. Except Belgium, France, Japan, Poland, and Spain samples.

(1) (2) (3) (4) (5)

Employee relation: a 0.424⁎⁎⁎ 0.537⁎⁎⁎ 0.449⁎⁎⁎ 0.508⁎⁎⁎ 0.494⁎⁎⁎

Panel B. Except Belgium, France, Japan, Poland, and Spain samples.

(1) (2) (3) (4) (5)

Leverage −0.088 −0.072 −0.084 −0.095 −0.083

4.4. Endogeneity concerns

(1) (2) (3) (4) (5)

EW employee relation: a⁎ 0.747⁎⁎⁎ 0.787⁎⁎⁎ 0.779⁎⁎⁎ 0.666⁎⁎⁎ 0.732⁎⁎⁎

4.4.1. Two-stage least squares and dynamic system GMM

(1) (2) (3) (4) (5)

PCA employee relation: a⁎⁎ 0.454⁎⁎⁎ 0.483⁎⁎⁎ 0.478⁎⁎⁎ 0.411⁎⁎⁎ 0.451⁎⁎⁎

(1) (2) (3) (4) (5)

Employee relation: a 0.345⁎⁎⁎ 0.327⁎⁎⁎ 0.322⁎⁎⁎ 0.324⁎⁎⁎ 0.316⁎⁎⁎

4.4.2. Granger causality tests

(1) (2) (3) (4) (5)

Employee relation: a 0.863⁎⁎ 0.775⁎⁎ 0.731⁎⁎ 0.814⁎⁎ 0.814⁎⁎

Tobin's qt-1 −0.007 0.001 −0.024⁎⁎ 0.001 −0.024⁎⁎ 0.001

Appendix A. Variable description

Variable Description Source

(continued on next page)

Variable Description Source

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