Employee Capitalism or Corporate Socialism? Broad-Based Employee Stock Ownership

Abstract

Employee share ownership plans (ESOPs) increase employee compensation. The gains are concentrated in small ESOPs, defined as those controlling less than 5% of outstanding shares. However, we also find evidence that some large ESOPs appear to act as management-worker alliances ala Pagano and Volpin (2005), wherein management bribes workers to garner worker support in thwarting hostile takeover threats. Worker compensation increases following the adoption of large ESOPs by firms in noncompetitive industries when implemented during takeover battles and/or when the implementation takes place after the state of incorporation enacts Business Combination Statutes, which makes large ESOPs an especially effective anti-takeover device. The effects on firm valuation also depend on the competitive pressure from the product market: When the pressure is strong, ESOPs exhibit no relation to firm valuation, consistent with the contracting view that ESOPs are a part of equilibrium incentive contracts. When the pressure is weak, by contrast, firm value is related to the size of employee share ownership in a hump shaped fashion. The absence of strong external pressure for good governance seems to allow management and workers to capture incentive contracts. The deviation from equilibrium contracts allows the identification of how employee ownership affects firm value.