Abstract
M In recent years, the number of publicly held firms sponsoring leveraged Employee Stock Ownership Plans (ESOPs) has grown significantly. Currently, more than 9,000 firms have ESOPs and over 9 million employees receive part of their compensation through ESOPS (see the National Center for Employee Ownership). Several factors are often advanced to explain leveraged ESOP adoptions, including their value in (i) providing tax benefits, (ii) increasing employee productivity, and (iii) defending against hostile takeovers. While each of these factors is a potential source of shareholder value, little evidence currently exists to show whether shareholders in ESOP firms realize any of these purported benefits. (For further discussion of the motivations for ESOP adoption, see Bruner [1], Chen and Kensinger [3], Scholes and Wolfson [6], and Chaplinsky and Niehaus [2].) Two important issues affect the ability of shareholders to benefit from ESOPs: (i) the corporate tax benefits from a leveraged ESOP and (ii) the effect of an ESOP on the distribution of cash flows between
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