The ESOP Performance Puzzle in Public Companies

While some authors propose that the existence of an ESOP will add to firm value by aligning the incentives of employees with those of the shareholders, others argue that ESOP participants will use their ownership voice to push for increasing wages and benefits, to the detriment of the shareholders. Previous empirical tests of ESOP performance effects have yielded mixed results. In this paper, we attempt to reconcile the differences by comparing publicly traded ESOP firms to size- and industry-matched peer firms using a matched-pair methodology consistent with that of Spiess and Affleck-Graves (1995) and Barber and Lyon (1997).Specifically, we investigate whether the existence of an ESOP does, in fact, affect public-firm performance and condition in a positive way. By comparing our sample of publicly-traded ESOP firms with their non-ESOP peers, we discover significant differences in operating performance generally favoring the ESOP firms. Most notable are the findings that ESOP firms generally have lower risk, manage growth more conservatively, and have higher return on assets than do non-ESOP publicly-traded companies, all of which support the arguments in favor of incentive alignment and the value of the "ownership culture".