Does employee ownership reduce agency costs? Evidence from French listed companies

Abstract

Employee stock ownership (ESO) is often associated with reductions in agency costs because it increases employee satisfaction and attachment to their company and aligns the interests of employees with those of their firm. Another stream of research argues that ESO may have the opposite effect on agency costs because it serves as a management entrenchment tool and leads to divergence between stakeholders. This paper examines the relationship between ESO and agency costs in France, which is a leading European country for ESO. Using a panel database of 125 firms over the period 2002–2016, we find an inverted U-shaped relationship between ESO and agency costs. That evidence highlights that low levels of ESO increase agency costs, which is consistent with managerial entrenchment mechanisms. The findings also suggest that beyond a certain point, ESO reduces agency problems because it links employee wealth to their firm’s success.