Investigating reverse causality between human resource management policies and organizational performance in small firms

Purpose The purpose of this paper is to test reverse causality between human resource management (HRM) policies and organizational performance, through the intervening steps of employee attitudes (satisfaction, commitment, motivation) and employee behaviors (absences, turnover, disputes), which are still relatively untested in small firms and in a non‐US/UK context such as Greece. Design/methodology/approach Structural equation modeling was used to survey data from 197 small Greek private companies (manufacturing, services, trade) to examine causal inferences. Findings The study finds that HRM policies, being contingent on business strategies (cost, innovation, quality), have a positive effect on organizational performance through employee attitudes and employee behaviors. Furthermore, the study supports the view that although HRM policies do not directly lead to high organizational performance, it is high‐performing firms that can directly afford HRM policies. Research limitations/implications Although time‐lags are not present in the study in order to test time‐dependent reverse causality, the concept of instant changes is used to empirically demonstrate, through a simultaneous equation system, the causal order of the variables involved in the relationship under consideration. Practical implications Based on the business strategies of improvement of goods, quality enhancement and improvement of service, rather than on trying to cut costs and prices, the findings have implications for practitioners seeking to design HRM policies that will improve organizational performance. Originality/value The paper examines reverse causality within a simultaneous equations system expressing the relationship between HRM policies and organizational performance.