Abstract
This paper examines whether the announcement of an employee stock ownership plan (ESOP) affects stock price crash risk and the mechanism by which the ESOP may influence crash risk, using a sample of Chinese A-share firms from the period 2014 to 2017. We provide evidence that an ESOP announcement is significantly and negatively related to a firm’s stock price crash risk. An ESOP announcement sends positive signals to the market that insiders are optimistic about a firm’s future value, which helps enhance investor confidence, resist the pressure for a fire sale caused by negative information disclosure, and reduce stock price crash risk. Further research shows that larger-scale, lower-priced and non-leveraged ESOPs are more helpful in reducing crash risk. This paper sheds lights on the impact of ESOPs in a volatile market environment. It also contributes to firms’ implementation of ESOPs and the development of the legal system in capital markets.
Highlights
The China Securities Regulatory Commission (CSRC) issued the “Guiding Opinions on the Pilot Program for the Implementation of the Employee Share Ownership Plans by Listed Companies” (“Opinions”) on June 20, 2014
This paper finds that the impact of employee stock ownership plan (ESOP) on stock price crash risk depends on the characteristics of the ESOPs
The positive relationship of ESOP leverage to crash risk maybe caused by specific signals from leveraged ESOPs under particular market situations
Summary
The China Securities Regulatory Commission (CSRC) issued the “Guiding Opinions on the Pilot Program for the Implementation of the Employee Share Ownership Plans by Listed Companies” (“Opinions”) on June 20, 2014.
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