Nexus of Employee Stock Ownership with Cost of Capital: Evidence from KSE 100

Abstract

This study investigates the effect of employee stock ownership on a company's cost of capital. It takes employees into great consideration and tries to overcome the agency conflict that exists within the company by adopting the employee's stock ownership plan. The panel data regression is run in order to find out the effect of employee stock ownership on a company’s cost of capital. This study hypothesizes that employee stock ownership will tend to reduce the company's cost of capital, due to a decrease in the cost of equity and debt cost of the corporations. From KSE 100 companies were chosen for our research analysis, the study employs a sample size of 209 companies. 11 years of data were collected (2010-2020), a panel data regression was run due to cross sectional and time-series data. The research showed that there is a substantial impact of employees’ stock ownership on the company's cost of capital, equity cost, and company's debt cost, and a negative relationship exists between the independent and dependent variables. Employee stock ownership increases the company's cost of debt, equity cost and capital cost decreases. The research involves employee stock ownership as the variable because there are few research works yet been conducted especially in Pakistan. It also contributes towards the bond found between ESO and agency cost that how it helps to minimize the cost and benefits to the company and shareholders. This study offers a contribution towards the literature concerning ESO and the company’s capital cost. It is useful for the companies, as this shows that adopting the employee's stock ownership plan reduces the company’s capital cost, cost of debt, and equity as a whole, and most importantly the principal-agent conflict is minimized. The financial companies are fully ignored which may represent different results and may vary according to the sectors as well. The given effect can also be checked by taking stock prices as the dependent variable.