1 Employee capitalism or corporate socialism? Broad-based employee stock ownership E. Han Kim 1 and Paige Ouimet 23 Abstract Employee share ownership plans (ESOPs) increase employee compensation. The gains are concentrated in small ESOPs, defined as those controlling less than 5% of outstanding shares. However, we also find evidence that some large ESOPs appear to act as management-worker alliances ala Pagano and Volpin (2005), wherein management bribes workers to garner worker support in thwarting hostile takeover threats. Worker compensation increases following the adoption of large ESOPs by firms in non- competitive industries when implemented during takeover battles and/or when the implementation takes place after the state of incorporation enacts Business Combination Statutes, which makes large ESOPs an especially effective anti-takeover device. The effects on firm valuation also depend on the competitive pressure from the product market: When the pressure is strong, ESOPs exhibit no relation to firm valuation, consistent with the contracting view that ESOPs are a part of equilibrium incentive contracts. When the pressure is weak, by contrast, firm value is related to the size of employee share ownership in a hump shaped fashion. The absence of strong external pressure for good governance seems to allow management and workers to capture incentive contracts. The deviation from equilibrium contracts allows the identification of how employee ownership affects firm value. October 29, 2009 JEL classification: G32, M52, J54, J33 Keywords: ESOPs, Employee Incentives, Worker Wages and Compensation 1 Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109; email: [email protected]. 2 Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC 27599; email: [email protected]. 3 We are grateful for helpful comments/suggestions by Sreedhar Bharath, Amy Dittmar, Charles Hadlock, Francine Lafontaine, Margaret Levenstein, Randall Morck, Clemens Sialm, Jagadeesh Sivadasan, seminar participants at INSEAD, University of Hawaii, University of Michigan, University of Oxford, and participants of Madrid conference on Understanding Corporate Governance, the US Bureau of Census Conference, the Census Research Data Center Annual Conference, and the International Conference on Human Resource Management in Banking Industry. We acknowledge financial support from Mitsui Life Financial Research Center. The research was conducted while the authors were Special Sworn Status researchers of the U.S. Census Bureau at the Michigan Census Research Data Center. Research results and conclusions expressed are those of the authors and do not necessarily reflect the views of the Census Bureau. This paper has been screened to insure that no confidential data are revealed.
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1
Employee capitalism or corporate socialism?
Broad-based employee stock ownership
E. Han Kim1
and Paige Ouimet23
Abstract
Employee share ownership plans (ESOPs) increase employee compensation. The gains
are concentrated in small ESOPs, defined as those controlling less than 5% of outstanding
shares. However, we also find evidence that some large ESOPs appear to act as
management-worker alliances ala Pagano and Volpin (2005), wherein management
bribes workers to garner worker support in thwarting hostile takeover threats. Worker
compensation increases following the adoption of large ESOPs by firms in non-
competitive industries when implemented during takeover battles and/or when the
implementation takes place after the state of incorporation enacts Business Combination
Statutes, which makes large ESOPs an especially effective anti-takeover device. The
effects on firm valuation also depend on the competitive pressure from the product
market: When the pressure is strong, ESOPs exhibit no relation to firm valuation,
consistent with the contracting view that ESOPs are a part of equilibrium incentive
contracts. When the pressure is weak, by contrast, firm value is related to the size of
employee share ownership in a hump shaped fashion. The absence of strong external
pressure for good governance seems to allow management and workers to capture
incentive contracts. The deviation from equilibrium contracts allows the identification of
how employee ownership affects firm value.
October 29, 2009
JEL classification: G32, M52, J54, J33
Keywords: ESOPs, Employee Incentives, Worker Wages and Compensation
1 Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109; email: [email protected].
2 Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC 27599; email:
[email protected]. 3 We are grateful for helpful comments/suggestions by Sreedhar Bharath, Amy Dittmar, Charles Hadlock,
Francine Lafontaine, Margaret Levenstein, Randall Morck, Clemens Sialm, Jagadeesh Sivadasan, seminar
participants at INSEAD, University of Hawaii, University of Michigan, University of Oxford, and
participants of Madrid conference on Understanding Corporate Governance, the US Bureau of Census
Conference, the Census Research Data Center Annual Conference, and the International Conference on
Human Resource Management in Banking Industry. We acknowledge financial support from Mitsui Life
Financial Research Center. The research was conducted while the authors were Special Sworn Status
researchers of the U.S. Census Bureau at the Michigan Census Research Data Center. Research results and
conclusions expressed are those of the authors and do not necessarily reflect the views of the Census
Bureau. This paper has been screened to insure that no confidential data are revealed.
determined by the contracting environment and, therefore, will not exhibit any systematic
relation to the firm value (Demsetz and Lehn, 1985 and Himmelberg, Hubbard, and Palia,
1999). This explains the lack of relation in Columns 6 and 7.
When external pressure for good governance is weak, however, management and
employees may capture incentive contracts by forming an alliance. Such capture will
result in employee ownership that deviates from the optimal contract, making it possible
for the researcher to identify a relation between firm value and share ownership. The
inverted U-shaped relation suggests that at a low level of share ownership, the cash flow
right effect enhances value creation by aligning employee self interest with the
shareholder value. However, at a higher level of ownership, the greater employee control
rights help form a management-employee alliance for mutual entrenchment, negating the
alignment effect. In other words, the weak external pressure for good governance leaves
more slack for ownership to cure or exacerbate agency problems, making the effects of
ownership more pronounced.
C. Large ESOPs and Management-Worker Alliance
We conjecture that the management-employee alliance takes a form similar to that
in the Pagano and Volpin (PV) model, in which managers concerned with hostile
takeover threats bribe workers with above-market wages in return for their cooperation in
fending off takeover bids. Such an alliance is likely to occur with large ESOPs, because
to use ESOPs as an effective anti-takeover device requires substantial control rights
belonging to workers. We also assume competitive pressures in low eHHI industries will
25
constrain such alliances between employees and management. Thus, we hypothesize that
changes in employee compensation associated with large ESOPs will be higher in
industries with low competitive pressure as compared to those with high competitive
pressure.
In Table 4 we report regression estimates for high and low eHHI subsamples. All
regressions include establishment and year fixed effects, log establishment age, state-year
mean wages, industry-year mean wages, log sales, and leverage, however the coefficients
on these control variables are not reported. Column 1 reports the full sample result; in
column 2, we exclude the variable ESOP. By estimating the coefficient on ESOPg5
without including ESOP, we estimate the net correlation between employee
compensation and large ESOPs.
Column 2 shows that wages decline at firms which establish large ESOPs. If the
compensation increases observed following the initiation of a small ESOP reflect
productivity gains, this result could indicate that large ESOPs decrease productivity.
Alternatively, because our measure of compensation does not include the value of shares
granted to employees, the compensation declines following the initiation of large ESOPs
may reflect substitution of cash wages for the ESOP shares–-especially at cash
constrained firms.
In columns 3 and 4, we limit the sample to firms in industries with eHHI indexes
above the sample median (weak competition); in Columns 5 and 6, industries with eHHI
below the median (strong competition.) Comparing Columns 3 and 4 with Columns 5 and
6 reveals that the negative effects large ESOPs have on compensation is much smaller
26
when the competition is low, i.e., the strength of external pressure of good governance is
weak.
Column 5 also shows that the adoption of a small ESOP at firms with low eHHI
(competitive firms) is associated with a positive and significant increase in compensation.
This is consistent with higher productivity following the ESOP adoption and workers in
competitive industries capturing a fraction of these gains in the form of higher
compensation. In contrast, Column 3 shows that the adoption of a small ESOP at firms
with high eHHI (non-competitive firms) has no effect on employee compensation.
Perhaps in non-competitive industries wages are not determined competitively, allowing
firms to capture all productivity gains, if any.
While we cannot strictly exclude the possibility that our results are picking up
unobserved time-varying heterogeneity in firms, this evidence is more consistent with a
causal interpretation. A selection story would argue that some managers are more
generous with their employees. These generous managers increase employee
compensation by increasing cash wages and by establishing an ESOP. If true, this
selection story would predict a positive correlation between wages and the establishment
of an ESOP. However, the selection story would also predict that wages would increase
less at firms in competitive industries as competitive pressures will constrain managerial
generosity. We find the opposite. All of the wage increases associated with small
ESOPs occur at firms in competitive industries.
D. Substitution of Cash Wages with ESOP shares
Our estimation of the impact of ESOPs on employee compensation
underestimates the true impact because our compensation data does not include the value
27
of shares granted to employees. The underestimation is likely to be most visible for cash
constrained firms initiating ESOPs to conserve cash. Thus, in this section, we control for
whether or not the firm initiating the ESOP appears to be cash-constrained. We follow
Hadlock and Pierce (2009) and identify cash constrained firms as young firms with a
small book value of assets. Specifically, we define a variable “CCindex” as a continuous
variable which measures how young and small a firm is, relative to the rest of the sample.
To construct this measure, we estimate the difference in both the firm age and firm size
(total assets in 2006 $) as compared to the sample means. Both of these differences are
then normalized by the sample standard deviation for that variable.19
These two variables
are then summed to create a credit constrained score. Given the large skewness in this
score, we do not directly use this score; instead, we create a ranking based on each firm’s
cash constrained score. This ranked variable is the “CCindex,” which awards the highest
value to the firm which is the youngest and smallest. This variable is only estimated for
firms establishing the large ESOPs as these ESOPs provide for the best opportunity to
substitute ESOP shares for cash wages in a large scale. Thus, CCindex is set to 0 for
firms without large ESOPs.
In Table 5, we report the results after controlling for cash-constrained ESOPs.
Column 1 shows that for firms establishing large ESOPs, the more cash constrained the
firm, the more employee compensation declines afterward. This is not surprising because
our compensation data excludes the value of shares granted to employees. Cash
constrained firms are more likely to initiate ESOPs as a means to shift wages to a form of
non-cash compensation.
19
For example, for age this variable is calculated as: [Firm age – mean age]/sample standard deviation for
the variable age.
28
The coefficient on ESOPg5 in column 1 of table 5 is still negative and significant
but the magnitude is greatly diminished relative to the coefficient on ESOPg5 in column
1 of Table 4. More important, column 3 in Table 5 reveals a positive and significant
coefficient on ESOPg5 for firms under weak competitive pressure. This is consistent with
our argument that these large ESOPs at firms in non-competitive industries are more
likely to represent worker-management alliances. Without strong external pressure for
good governance, management establishes the large ESOPs to entrench themselves and
then overpays workers so that they will vote with management in the event of hostile
takeover bids.
E. Large ESOPs and Management-Worker Alliance – Further Evidence
Another approach to identify ESOPs which may have been initiated as part of a
worker-management alliance is to look directly at those ESOPs initiated during a
takeover battle. We create a new dummy variable “TO” which assumes a value of one if
the firm has an ESOP and this ESOP was established during a takeover battle, otherwise
“TO” assumes a value of zero. TO is a subset of our ESOPs. We identify whether or not
the ESOP was established during a takeover battle from Blasi and Kruse (1991).
The authors identify an ESOP as being implemented during a takeover battle
based on public documents. As such, TO is an imperfect measure of whether or not an
ESOP was implemented during a takeover battle. It is likely that some firms may have
been under (or perceived that they were under) takeover pressure which was not
publically disclosed. Furthermore, since the book was published in 1991, all ESOPs
established after 1991 are classified as implemented not under takeover pressure. As such,
while all observations captured by the TO variable were implemented under takeover
29
pressure it is likely that some observations not captured by the TO variable were also
implemented under takeover pressure.
We predict that ESOPs implemented under takeover pressure are most likely to
represent worker-management alliances – in which case we would expect wages to
increase following these ESOPs. However, as evidenced in Table 5, column 5, for the
sample as a whole we find wages decline following TO ESOPs. One explanation of this
finding could be that these TO ESOPs tend to be the largest in terms of value of shares
granted to employees. If wages are reduced to offset the value of the ESOP shares
transferred to employees, then we would predict the greatest negative drop with these TO
ESOPs.
Looking at competitive and non-competitive industries separately, we find
additional evidence in support of the worker-management alliance story. In non-
competitive industries, we find that wages increase following a TO ESOP. (Table 5,
column 6) We expect these TO ESOPs to be most likely to be motivated by managerial
entrenchment and we expect managerial entrenchment to be most valuable to CEOs in
non-competitive industries. In contrast, we find that wages decline following TO ESOPs
in competitive industries (Table 5, column 7).
An alternative interpretation of our results is that managers which implement
large ESOPs are just generous managers who like to give large benefits to their workers.
Our finding that wage increases following large ESOPs are concentrated at firms in non-
competitive industries may simply reflect that these industries have the greatest amount
of financial slack in order to compensate their workers. To better separate our worker-
management alliance interpretation from a generous manager story, we next consider the
30
interaction of the passage of business combination statute laws (BCS) and ESOPs,
establishment-level unionization rates and ESOPs and leverage and ESOPs.
The passage of BCS laws makes ESOPs more effective takeover deterrents.
These new regulations state that if a block of investors, unaffiliated with management,
vote against a tender offer, the acquirer must wait three to five years before pursuing the
takeover. Because courts have established ESOPs as “outside” investors, large ESOPs
can be especially effective at preventing hostile takeovers in those states. Furthermore,
the passage of BCS laws are considered to be exogenous events, as argued in Bertrand
and Mullanaithan (2003).
Thus, if managers use the ESOP to create an alliance with workers, then post-
BCS workers are now more powerful and it would be even more advantageous to
managers to encourage worker loyalty through higher wages. Alternatively, if our results
are not-causal and a generous manager is simultaneously implementing a large ESOP and
increasing wages then there should be no effect upon passage of the BCS.
Before we consider the interaction of BCS and ESOP we confirm the effect of the
passage of BCS on wages for all firms in our sample. Increases in employee
compensation have previously been documented following the enactment of business
combination statutes (BCS) by Bertrand and Mullainathan (1999, 2003), who attribute it
to management’s pursuit of quiet lives after BCS relieve them of the threat of hostile
takeovers. Our sample shows that 76% of ESOPs initiated after New York State first
passed BCS in 1985 are established by companies incorporated in states with BCS in
effect. Thus, it is possible that the wage gains we observe post-ESOP may not be ESOP-
specific and may instead be picking up the fact that our EOSPs are concentrated in BCS
31
states. Thus, we first check whether the increases in wages accompanying ESOPs are
proxying for this economy-wide BCS effect as documented in Bertrand and Mullainathan
(1999, 2003). In table 6, column 1, we control for whether an establishment-year
observation belongs to a firm incorporated in a state with BCS in effect. Consistent with
Bertrand and Mullainathan (1999, 2003), we find a positive increase in wages associated
with BCS. However, our finding is not significant.20
More important, the coefficient
estimates for both small and large ESOPs remain positive and significant, with the
magnitude virtually unchanged from those in table 2, column 1.
In table 6, column 2, we explore whether wages at ESOP firms are affected by the
increase in employee power following BCS. We focus on those firms with large ESOPs
in concentrated industries as we expect these ESOPs to most likely be motivated by
worker-management alliances. We find a positive coefficient on the interaction of BCS
and ESOPg5 indicating that wages increase following the passage of BCS at firms with
the largest ESOPs – when located in concentrated industries. We do not find an increase
in wages at firms in concentrated industries with small ESOPs. In unreported results, we
find a modest decline in wages at these firms post-BCS. This evidence supports our
argument that at least some of the large ESOPs in concentrated industries reflect worker-
management alliances.
To provide further collaborating evidence to the causal interpretation of the
compensation increases, we consider the disciplining role of financial leverage. Bronars
and Deere (1991) argue with supporting evidence that the ability of unions to extract
20
Our estimate of BCS effect on wages is smaller than those reported by Bertrand and Mullainathan. There
are two explanations of this difference. For one, we use a different dataset as compared to their 1999 paper.
Bertrand and Mullainathan looked at all manufacturing firms, we look across all industries but limit our
sample to our ESOP firms and a matched sample. Furthermore, we use a different time period.
32
concessions from shareholders can be limited by a high debt ratio because of its implied
threat of bankruptcy. According to this argument, workers’ ability to use the control
rights bestowed by a large ESOP will be weaker if the firm has a high financial leverage.
Thus, we predict employee compensation increases following ESOPs most likely
initiated to achieve a worker-management alliance (large ESOPs initiated by firms in
non-competitive industries) will be smaller at firms with higher leverage.
To test this prediction, we include an interaction of leverage and ESOP and
leverage and ESOPg5 in Table 6. In column 3, we find that in non-competitive industries
the coefficient on the interaction of ESOPg5 and leverage is negative and significant.
The threat of bankruptcy implied in high leverage seems to suppress employee-owners’
ability to extract higher wages.
IV. Robustness checks
In this section we conduct additional robustness tests using alternative definitions
of large ESOPs, non-linear controls for firm size, and an alternative definition of Q. In
Table 7, we introduce ESOPg10, an indicator variable equal to one if the firm has an
ESOP that is estimated to control more than 10% of the shares outstanding at any point in
time. Although column 1 shows a negative coefficient on ESOPg10, its effects is not
significantly different from those of ESOPg5.21
Coles, Lemmon, and Meschke (2007) note that regression results of managerial
ownership on Tobin’s Q are sensitive to both the definition of and inclusion of non-linear
size controls. Column 2 includes both assets and assets squared and, in Column 3, sales
and sales squared. The results are robust to these additional controls. Finally, in column
21
Table 7 does not use the same set of matched control firms used in the earlier tests. In this table we
include all non-ESOP firms in Compustat as control firms. We are in the process of re-running this table
with the matched control firms.
33
4, we define Q as industry adjusted market to book value ratios, and then re-estimate
regression with different combinations of control variables. The results remain robust.
V. Conclusion
In this paper we investigate whether adopting broad-based employee stock
ownership enhances firm performance by improving employee incentives and team
effects. That is, does employee capitalism work? If so, how are gains divided between
shareholders and employees?
Our results suggest ESOPs increase productivity. However, unlike the evidence
of Jones and Kato (1995) on Japanese ESOPs on worker productivity, our evidence of
productivity increase is obtained by estimating the effects on two main direct
beneficiaries of productivity gains. When ESOPs are small, both employees and
shareholders can gain. We find that employees capture the lion’s share of any
productivity gains in competitive industries, consistent with the contracting view that
ESOPs are a part of equilibrium incentive contracts.
Alternatively, in non-competitive industries, shareholders realize positive gains.
This finding supports the notion that weak external pressure for good governance leaves
more slack for employee ownership to affect firm value. At a low level of share
ownership, cash flow rights bestowed by an ESOP enhance value creation by aligning
employee self interest with shareholder value. However, at higher levels of ownership,
employee control rights can negate the alignment effect by leading to management-
employee entrenchment, especially in non-competitive industries. In such cases,
managers concerned with hostile takeover threats bribe workers with above-market
wages in return for their cooperation in fending off takeover bids. We find evidence that,
34
in non-competitive industries, some large ESOPs may be motivated as a means to achieve
a worker-management alliance.
Finally, even when considering ESOPs motivated as worker-management
alliances, we find no evidence that employees are able to extract unearned compensation
increases. Although there might be some exceptions, the non-negative valuation impact
of large ESOPs does not support the notion that broad based employee share ownership
leads to corporate socialism. Quite to the contrary, employee share ownership seems to
generate value. How stockholders and workers share the benefits of value creation seems
to be largely dependent upon the size of control rights ESOPs grant to workers.
35
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38
Table 1. Panel A. Summary Statistics of Employee Stock Ownership Plans (ESOPs) by Year. Counts of observations and average size of employee ownership summarized over time. Fiscal Year
ESOP Initiations Count of ESOP firm-year observations
Table 1. Panel B. Firm-level summary statistics for ESOP firms and matched group. Accounting variables are from Compustat. All variables are winsorized at the 1%. Assets and sales are normalized to $2006. Qit is fiscal year-end market value of equity plus market value of preferred stock plus total liabilities divided by total assets. We follow Bebchuk and Cohen (2005) and industry adjust Q by subtracting the median Q matched by industry (3-digit SIC code) and year. Means are reported with median in parenthesis and standard deviations in brackets.
Firms which later adopt ESOPs
Firms with ESOPs Firms with ESOPg5 Matched Firms
Operating Income/Assets
0.129 (0.1)
[0.094]
0.117 (0.1)
[0.091]
0.110 (0.1)
[0.082]
0.099 (0.1)
[0.122]
Leverage 0.169 (0.1)
[0.157]
0.209 (0.2)
[0.172]
0.217 (0.2)
[0.173]
0.188 (0.1)
[0.180]
Assets (millions) 5,377.72 (563.3)
[11,953.69]
7,175.55 (1,529.1)
[13,545.77]
6,418.75 (1,242.2)
[13,039.51]
3,525.10 (327.7)
[9,243.48]
Sales (millions) 3,124.70 (663.1)
[6,233.29]
4,452.52 (1,172.8)
[7,728.11]
4,255.22 (1,187.0)
[7,610.72]
1,569.64 (318.8)
[3,902.00]
Capex/assets 0.070 (0.1)
[0.054]
0.063 (0.1)
[0.048]
0.062 (0.1)
[0.048]
0.063 (0.0)
[0.058]
Q 0.972 (0.8)
[0.760]
1.023 (0.8)
[0.884]
0.868 (0.8)
[0.576]
1.029 (0.8)
[0.949]
Industry- Adjusted Q 0.082 (0.0)
[0.561]
0.098 (-0.0)
[0.699]
-0.029 (-0.0)
[0.489]
0.129 (-0.0)
[0.763]
N 1480 1884 1136 8265
40
Table 1. Panel C. Establishment-level summary statistics for establishments owned by either ESOP firms or firms in the matched group. All variables are winsorized at the 1%. Wages per employee is normalized to $2006. Means are reported with median in parenthesis and standard deviations in brackets.
Firms which later adopt ESOPs
Firms with ESOPs
Firms with ESOPg5
Matched Firms
Annual payroll (thousands)
2,490.32 (371.6)
[6,807.09]
2,479.67 (321.3)
[6,783.98]
2,220.18 (279.4)
[6,407.07]
2,112.14 (298.4)
[6,087.46]
Number of Employees 58.406 (12.0)
[136.42]
52.416 (9.0)
[130.07]
48.049 (8.0)
[126.05]
47.362 (10.0)
[117.93]
Wages per employee (thousands)
40.522 (33.9)
[30.79]
51.893 (41.1)
[42.11]
52.981 (38.1)
[45.66]
39.693 (31.5)
[30.43]
N 206,433 364,820 232,664 671,504
41
Table 1. Panel D. Time series of log wages per employee and unexplained wages per employee. Average log wages per employee (in thousands) is reported and average unexplained wages is reported in parenthesis. Unexplained wages is the residual from the following regression: log wages per employee = a0 + a1 state-year mean wages + a2 industry-year mean wages + ε. State-year mean wages is the log mean wage per employee in the state of location of the establishment and matched by year. Industry-year mean wage is the mean log wage per employee matched to the establishment’s industry and by year. For the ESOP samples, relative year represents the year relative to when the ESOP was initiated (year 0). The matched sample is created at the time the ESOP is initiated and then the matched firms are followed over time. Thus, for the matched sample, the relative year represents the year relative to when the firm was matched to an ESOP firm initiating an ESOP (year 0.)
Relative Year Small ESOP only Large ESOP only Matched Firm
-2 3.462 (0.020) 3.521 (-0.010) 3.410 (-0.025)
-1 3.203 (0.010) 2.910 (-0.020) 2.928 (-0.019)
0 3.448 (0.045) 3.564 ( 0.030) 3.211 (-0.014)
1 3.597 (0.090) 3.669 ( 0.044) 3.406 (-0.016)
2 3.604 (0.055) 3.773 ( 0.026) 3.409 (-0.025)
42
Table 2. Wage changes around ESOP initiation. The dependant variable is log wages per employee. ESOP is a dummy variable which takes the value of 1 if the firm has an ESOP. ESOPg5 is a dummy variable which takes a value of 1 if the firm has an ESOP and this ESOP controls at least 5% of the firm's outstanding common stock at any given time. All regressions include plant and year fixed effects, however, the coefficients for these additional regression variables are not reported to conserve space. Establishment age and sales are log-transformed. Sales is normalized to $2006. The sample used is columns 1, 2, 3, and 5 includes both ESOP firms and the matched sample. Columns 4 and 6 use just the sample of firms which have an ESOP at some point (these columns exclude the matched sample.) Coefficients are reported with standard errors in parentheses. "*", "**", and "***" reflect statistical significant at the 10%, 5% and 1% respectively.
1 2 3 4 5 6
ESOP 0.163 (0.003) ***
0.062 (0.003) ***
0.061 (0.003) ***
0.122 (0.004) ***
0.061 (0.031) **
0.122 (0.033) ***
ESOPg5 -0.023 (0.004) ***
-0.079 (0.003) ***
-0.077 (0.004) ***
-0.089 (0.004) ***
-0.077 (0.043) *
-0.081 (0.041) **
State-year mean wages 0.610 (0.005) ***
0.608 (0.005) ***
0.651 (0.008) ***
0.608 (0.115) ***
0.651 (0.066) ***
Industry- year mean wages 0.368 (0.004) ***
0.368 (0.004) ***
0.299 (0.007) ***
0.368 (0.110) ***
0.299 (0.057) ***
Establishment age 0.008 (0.002) ***
-0.014 (0.004)
0.008 (0.015)
-0.014 (0.024)
Sales 0.000 (0.001)
-0.049 (0.003) ***
0.000 (0.013)
-0.049 (0.025)
Leverage -0.025 (0.007) ***
0.004 (0.010)
-0.025 (0.045)
0.004 (0.071)
Clustered standard errors at the firm level
No No No No Yes Yes
N 1,023,258 1,023,258 1,023,258 417,706 1,023,258 417,706
R-squared 0.826 0.847 0.847 0.860 0.493 0.450
43
Table 3. Q around ESOP initiation. The dependant variable is industry adjusted Q, windorized at 1%. Qit is fiscal year-end market value of equity plus market value of preferred stock plus total liabilities divided by total assets. We follow Bebchuk and Cohen (2005) and industry adjust Q by subtracting the median Q matched by industry (3-digit SIC code) and year. ESOP is a dummy variable which takes the value of 1 if the firm has an ESOP. ESOPg5 is a dummy variable which takes a value of 1 if the firm has an ESOP and this ESOP controls at least 5% of the firm's outstanding common stock at any given time. All regressions include firm and year fixed effects and the following variables: log total assets and log sales. Both variables are normalized to 2006$. However the coefficients for these control variables are not reported to conserve space. The sample used is columns 1 to 3 is the full sample of ESOP firms and the matched control sample of non-ESOP firms. The sample used in columns 4 and 5 is eHHI high. eHHI high includes all plants located in industries with employee Herfindahl index values above the sample median. The sample used in columns 6 and 7 is eHHI low. eHHI low includes all plants located in industries with employee Herfindahl index values below the sample median. Coefficients are reported with standard errors in parentheses. "*", "**", and "***" reflect statistical significant at the 10%, 5% and 1% respectively.
1 2 3 4 5 6 7
Sample All All All eHHI high eHHI high eHHI low eHHI low
Table 4. Wage changes around ESOP initiation by eHHI. The dependant variable is log wages per employee. ESOP is a dummy variable which takes the value of 1 if the firm has an ESOP. ESOPg5 is a dummy variable which takes a value of 1 if the firm has an ESOP and this ESOP controls at least 5% of the firm's outstanding common stock at any given time. All regressions include establishment and year fixed effects, establishment age, state year mean wages, industry year mean wages, log sales and leverage, however, the coefficients for these additional regression variables are not reported to conserve space. Establishment age and sales are log-transformed. Sales is normalized to $2006. The sample used is columns 1 and 2 is the full sample of ESOP firms and the matched control sample of non-ESOP firms. The sample used in columns 3 and 4 is eHHI high. eHHI high includes all plants located in industries with employee Herfindahl index values above the sample median. The sample used in columns 5 and 6 is eHHI low. eHHI low includes all plants located in industries with employee Herfindahl index values below the sample median. Coefficients are reported with standard errors in parentheses. "*", "**", and "***" reflect statistical significant at the 10%, 5% and 1% respectively.
1 2 3 4 5 6
Sample All All eHHI high eHHI high eHHI low eHHI low
ESOP 0.061 (0.003) ***
0.001 (0.004)
0.063 (0.004) ***
ESOPg5 -0.077 (0.004) ***
-0.024 (0.002) ***
-0.017 (0.005) ***
-0.016 (0.003) ***
-0.099 (0.006) ****
-0.042 (0.005) ***
N 1,023,258 1,023,258 531,944 531,944 491,314 491,314
R-squared 0.847 0.847 0.879 0.879 0.847 0.847
45
Table 5. Wage changes around ESOP initiation by eHHI with CCindex and TO. The dependant variable is log wages per employee. ESOP is a dummy variable which takes the value of 1 if the firm has an ESOP. ESOPg5 is a dummy variable which takes a value of 1 if the firm has an ESOP and this ESOP controls at least 5% of the firm's outstanding common stock at any given time. CCindex takes a value of 0 if the firm does not have a large ESOP. For firms with large ESOPs, CCindex reflect the relative ranking of cash constraints where a high value of CCindex implies a cash constrained firm. TO is a dummy variable which takes a value of 0 if the firm does not have an ESOP. TO takes a value of 1 if the firm has an ESOP and this ESOP was implemented under takeover pressure. All regressions include establishment and year fixed effects, establishment age, state year mean wages, industry year mean wages, log sales and leverage, however, the coefficients for these additional regression variables are not reported to conserve space. Establishment age and sales are log-transformed. Sales is normalized to $2006. The sample used is columns 1, 2 and 5 is the full sample of ESOP firms and the matched control sample of non-ESOP firms. The sample used in columns 3 and 6 is eHHI high. eHHI high includes all plants located in industries with employee Herfindahl index values above the sample median. The sample used in columns 4 and 7 is eHHI low. eHHI low includes all plants located in industries with employee Herfindahl index values below the sample median. Coefficients are reported with standard errors in parentheses. "*", "**", and "***" reflect statistical significant at the 10%, 5% and 1% respectively.
1 2 3 4 5 6 7
Sample All All eHHI high eHHI low All eHHI high eHHI low
ESOP 0.058 (0.003) ***
0.002 (0.004)
0.062 (0.004) ***
0.067 (0.003) ***
-0.004 (0.005)
0.070 (0.005) ***
ESOPg5 -0.019 (0.004) ***
0.034 (0.003) ***
0.009 (0.006) ***
-0.065 (0.007) ***
-0.020 (0.004) ***
0.008 (0.006)
-0.076 (0.007) ***
CCindex -0.083 (0.004) ***
-0.086 (0.004) ***
-0.038 (0.005) ***
-0.053 (0.013) ***
-0.077 (0.004) ***
-0.036 (0.005) ***
-0.038 (0.006) ***
TO -0.068 (0.005) ***
0.027 (0.006) ***
-0.064 (0.010) ***
N 1,023,258 1,023,258 531,944 491,314 1.023,258 531,944 491,314
Table 6. Wage changes around ESOP initiation by eHHI with BCS and leverage. The dependant variable is log wages per employee. ESOP is a dummy variable which takes the value of 1 if the firm has an ESOP. ESOPg5 is a dummy variable which takes a value of 1 if the firm has an ESOP and this ESOP controls at least 5% of the firm's outstanding common stock at any given time. All regressions include establishment and year fixed effects, establishment age, state year mean wages, industry year mean wages, log sales and leverage, however, the coefficients for these additional regression variables are not reported to conserve space. Establishment age and sales are log-transformed. Sales is normalized to $2006. The sample used is column 1 is the full sample of ESOP firms and the matched control sample of non-ESOP firms. The sample used in columns 2-3 is eHHI high. eHHI high includes all plants located in industries with employee Herfindahl index values above the sample median. Coefficients are reported with standard errors in parentheses. "*", "**", and "***" reflect statistical significant at the 10%, 5% and 1% respectively.
1 2 3
Sample All eHHi high eHHi high
ESOP 0.061 (0.003) ***
0.026 (0.015) *
0.008 (0.007)
ESOPg5 -0.077 (0.004) ***
-0.063 (0.021) ***
0.012 (0.009) *
BCS 0.003 (0.002)
-0.002 (0.003)
ESOP*BCS -0.027 (0.015) *
ESOPg5* BCS 0.048 (0.021) **
Leverage 0.033 (0.010) ***
Leverage * ESOP -0.038 (0.029)
Leverage * ESOPg5 -0.095 (0.031) ***
R-squared 0.847 0.879 0.879
N 1,023,258 531,944 531,944
47
Table 7. Changes to Industry Adjusted Q Following Adoption of an ESOP with Alternative Variable Definitions and Controls. Table 7 reports results from an OLS panel regression. In columns 1 through 3, the dependent variable is industry adjusted Q, defined as fiscal year-end market value of equity plus market value of preferred stock plus total liabilities divided by total assets. In column 4 the dependent variable is industry adjusted MB, defined as fiscal year-end market value divided by book equity. Industry adjustment is calculated by subtracting the median industry and year value. ESOP is an indicator variable which assumes the value of 1 if the firm has an ESOP at time t. ESOPg5 (ESOPg10) is an indicator variable which assumes the value of 1 if the firm’s ESOP is estimated to control more than 5% (10%) of the voting shares at any point over the lifetime of the ESOP. All continuous variables are winsorized at 1%. Assets and sales are normalized to 2006 $. Firm age is estimated as the difference between the current year and the first year the firm appears in Compustat. Both age variables are normalized by dividing by 100. “***”, “**”, and “*” indicate significance at the 0.01, 0.05, and 0.1 level. 1 2 3 4 ESOP 0.209