The impact of a compressed workweek on shareholder value: An event study analysis of Belgium's 4-day workweek legislation

Abstract

While the compressed workweek (CWW) has gained traction in recent years, its impact on firms' financial performance is not well understood. This study addresses this gap in the literature by examining the effect of the CWW on shareholder value. Drawing on social exchange theory and its norm of reciprocity, we introduce a conceptual model on the main effect of the CWW on shareholder value, and the moderating roles of the anticipated type and degree of employee reciprocation. To test the model's predictions, we exploit the announcement of Belgium's mandatory adoption of a CWW in February 2022 as the setting for a policy event study analysis. We find positive average stock price reactions of Belgian listed firms to the CWW's announcement, consistent with investors expecting the CWW to result in favorable employee reciprocation. Stock price reactions are more positive for firms with a lower ex ante employee productivity, suggesting employees are predicted to reciprocate with higher efforts. Stock price reactions are also more positive for firms with a higher reliance on knowledge workers, consistent with these employees deriving a greater utility from flexible working arrangements. Robustness tests, including a placebo analysis and an event study of international firms with Belgian subsidiaries, corroborate our results. Our study offers several theoretical contributions and has practical implications for HR managers and policymakers.