The effect of ESOP implementation on the value of large publicly held firms

This dissertation examined the corporate shareholders' perceptions of employee stock ownership (ESOP) implementation as reflected in the market return behavior of the sample of 128 large publicly-held ESOP firms identified by the National Automated Accounting Research System (NAARS). Each of these firms implemented an ESOP between January 1972 and December 1986. Market return reactions were than examined in relation to: (1) ESOP implementation in general, (2) classic (nonleveraged) ESOP implementation, (3) leveraged ESOP implementation, and (4) tax credit ESOP implementation. A discussion of the economic theory of ESOPs was presented with numerical examples of the various types of plans. Hypotheses were tested utilizing abnormal returns analysis in the context of both the simple market model and the Sharpe-Lintner model. With the exception of tax credit ESOP implementation, the implementation of an ESOP had a statistically significant positive impact on firm value as reflected by market returns of the common stock. In addition, financial characteristics of the ESOP firms were compared with a group of "well-matched non-ESOP firms." No statistically significant differences were found between the two groups. Betas of the ESOP firms were then compared to the market betas with respect to industry classification. Again, no significant differences were detected. Finally, a disaggregation of the firms with regard to endogenous events was performed. The cumulative average residuals (CARs) were then recalculated to eliminate the impact of endogenous events on the findings. The results, following the removal of the endogenous events, revealed significant positive abnormal returns that were either unchanged or even enhanced compared to the initial investigation. Results from this study were then presented and compared to other ESOP studies. The research revealed that ESOP implementation generally appeared to enhance the wealth of large publicly-held firms in all but the tax credit case.