1. Employee Ownership and Firm Disclosure Rutgers Fellowship Meeting February 25 th, 2011 Francesco Bova Yiwei Dou Ole-Kristian Hope Rotman School of Management University of Toronto

2. 2 Employee Ownership and Firm Disclosure Much debate over the role of employee ownership (for rank-and-file employees) in the economy Contrasting viewpoints over the last decade Proponents: “Shared Capitalism”: employee ownership improves morale, lowers turnover, improves productivity. Makes both the firm and employees better off: win-win Opponents: Catastrophic failures of employee majority-owned firms Post-Enron, concerns over correlated risk Our study adds to the debate by assessing employee ownership’s effect on a firm’s propensity to be transparent and produce higher quality disclosure

3. Voluntary disclosure Theory (e.g., Verrecchia 2001; Dye 1985; Jovanovic 1982) suggests that firms should be fully transparent if there are no costs to being transparent Empirically however we continue to observe variation in disclosure quality (Beyer et al. 2009), implying a tension between the costs and benefits to disclosure A potential explanation is that there are proprietary costs to disclosure which are driven by rent-extracting firm stakeholders (e.g., competitors, suppliers) We focus on the firm’s employees as a group of stakeholders that have the potential to extract above-market rents from the firm and on employee ownership as a tool to mitigate this ability

4. Prior Literature Information asymmetry when employees can extract above- market rents: Scott (1994) – Canadian firms which were highly unionized or which have employees with higher than average salaries were less likely to disclose pension data Hilary (2006) – unionized firms exhibit higher information asymmetries than non-unionized firms Bova (2010) – unionized firms more likely to miss estimates and less likely to guide expectations down to meet or beat estimates Bens, Berger, and Monahan (2011) – Firms in industries with high labor costs are less likely to disaggregate segment information Cramton, Mehran, and Tracy (2008) find that employee ownership in an environment where employees can extract above market rents leads to a: weaker bargaining position for employees the firms becoming more amenable to demands fewer disputes involving strikes

5. Research Questions Impact of employee ownership on voluntary disclosure? Employee ownership aligns objectives and decreases negotiation leverage; decreasing negative consequences (but no effect on costs to opaqueness) H1: Positive relation between employee ownership and voluntary disclosure Impact of employee bargaining power on disclosure? We predict that firms have incentive to disclose less H2: Negative relation between union density and voluntary disclosure Interaction? If incentive to disclose less the greater the employee negotiation power, and if ownership mitigates power, then predict ownership to be more important the greater the negotiation leverage: H3: The positive relation between employee ownership and disclosure is larger with higher union density

6. Research Design: Test Variables ESOP Employee stock ownership plan (ESOP) is our proxy for employee ownership Source: Form 5500 (King of Pension Funds database); 1999-2007 ESOP = 1 if firm i has an employee stock ownership plan in year t and zero otherwise (i.e., in the control sample). [Also changes tests and continuous variable.] We don’t use evidence of other types of employee ownership plans for several reasons UNIONR Proxy for employee negotiation leverage Union density by 3-digit SIC industry code before 2002 and 6-digit NAICS industry code after 2002 Obtained from the Union Membership and Coverage Database Updated every year in our tests

9. Results: Table 5 (DSCORE) DSCORE: aggregate measure of disclosure We include all controls from tables 3 and 4 (1)(2) DSCORE ESOP0.041***0.001 (3.05)(0.05) UNIONR-0.002***-0.004*** (3.23)(4.58) ESOP×UNIONR0.003*** (2.94) ALL CONTROLS YES Year FEYES Observations4,197 Adj. R-squared0.3120.316

10. Robustness Checks Several robustness tests Changes tests –Look at DSCORE for firms that adopt plans pre and post adoption A continuous proxy for employee ownership –Look at assets held per participant Other reasons to adopt an ESOP –Cash constraints, anti-takeover defence Effect of Reg FD Heckman and other matching procedures All results consistent with ESOPs improving disclosure and that the effect is particularly strong in highly unionized settings.

11. Conclusions Both the level and quality of disclosure increasing (decreasing) in employee ownership (employee bargaining power) The general tenor of the results suggests that the role of employee ownership in improving disclosure is particularly large when employees have negotiation power (interaction effect) Results suggest: Employee ownership as a novel determinant to various facets of disclosure A novel capital market benefit to firms adopting an employee ownership plan (improved disclosure) Possible extensions: Bova (2011) an increased propensity to MBE for ESOP firms Employee ownership and the cost of capital? Employee ownership and real effects?