Employee stock ownership incentives and contracting efficiency: with evidence from employee stock ownership plan adopters
This dissertation develops a microeconomic rationale for the use of broad-based stock incentives in the presence of a central monitor. I show that the ability of stock to align owner and employee interests is a function of marginal monitoring costs. The theory yields two pairs of refutable implications. First, the optimal level of individual employee ownership is negatively related to firm size and positively related to marginal monitoring costs. Second, the change in firm value attributable to employee stock ownership is positively related to both the level of individual employee ownership and marginal monitoring costs. I gather data from firms initiating Employee Stock Ownership Plans (ESOPs) during the years 1986 through 1991. I test the first pair of implications by regressing average individual employee ownership on a cross-section of firm attributes; the second pair by regressing the cumulative abnormal daily stock price returns realized when an ESOP is announced on a cross-section of firm attributes. Finally I perform multinomial logit regressions on panel data to estimate the effects of changes in a cross-section of firm attributes on the likelihood of adopting a leveraged or nonleveraged ESOP. The strongest support for my theory comes from the first test. Average employee ownership is positively related to marginal monitoring costs and negatively related to firm size. The theory receives additional though weaker support from the second test. Cumulative abnormal returns associated with ESOP announcements are positively related to some proxies for marginal monitoring costs for both types of ESOPs but not to average employee ownership, with the statistical significance of the relationships dependent upon model specification. The third test provides minimal support for the theory. The likelihood of adopting a leveraged ESOP is positively related to increases in only one of the four proxies for marginal monitoring costs. The likelihood of adopting a nonleveraged ESOP exhibits no relationship to changes in any proxy for marginal monitoring costs.