The effect of ESOP adoptions on corporate performance: are there really performance changes?

Employee Stock Ownership Programs (ESOPs) have long been promoted as a motivational tool: employees become profit-minded owners. Latterly, however, more ESOPs are being used as part of a takeover defense: here the ESOPs main purpose is to put more company stock in friendly hands-the employees-who, like existing management, could suffer layoffs, etc. in a hostile takeover. We find that, as a group, only the takeover-related ESOPs are associated with increased leverage (itself a takeover defense). Non-target firms show no long-term increase in debt-to-assets. We find little evidence to support the motivation hypothesis: while actual labor costs are lower for ESOP firms, after industry-adjusting they tend to be unaffected or higher. We find that a few measures of firm financial performance [return-on-equity (ROE), return-on-assets (ROA), net profit margin (NPM)] do improve significantly, but this appears to be largely a short-term effect. Industry-adjusted holding period returns appear to be unaffected by the ESOP; however, ESOP firms that leverage show evidence of long-term market underperformance. We conclude that ESOPs provide, at best, only a short-term boost to corporate performance. Copyright © 2000 John Wiley & Sons, Ltd.