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Published byCornelius Gordon Blankenship Modified over 9 years ago
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The Illusive Performance Effect of ESOPs: Evidence from China’s Reform Experiment Xiangdong Ning Tsinghua University (Beijing) Xianming Zhou University of Hong Kong
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Employee Stock Ownership Plans (ESOPs) In U.S. and Japan: Used as an alternative pension plan, which links employee’s retirement wealth to the firm’s stock price performance Having a tax-saving benefit (in U.S.) In China: As part of the economic reform, the ESOP was introduced in early 1990s, purely as an incentive scheme
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Previous Studies on ESOPs Focus on US and Japanese firms Document a positive announcement effect: stock price increases after a firm’s announcement of adopting an ESOP (in U.S.) e.g., Gordon and Pound (1990), Beatty (1995) Mixed evidence for the ESOP effect on the firm’s post- adoption performance (the employee incentive effect) e.g., Dunbar (1989), Jones and Kato (1995)
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Our Study Provide the first evidence on the Chinese ESOP. The policy experiment on ESOP in China provides a setting close to a natural experiment: a firm’s adoption of an ESOP is largely determined by policies but not by firms’ choice. Hence, our results are unlikely to suffer from an endogeneity problem. Main finding: ESOP has no effect on the firm’s performance
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Sample and Data The sample consists of all 750 firms listed on Shanghai Stock Exchange and Shenzhen Stock Exchange during 1996-2000, among which 251 adopted an ESOP. Data sources: (i) The financial information database distributed by Genius Information Technology Co.; (ii) Chinese Stock & Accounting Research Database distributed by Guo Tai An Information Technology Co.
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Research Method We compare firm performance for six post-adoption years between ESOP firms and non-ESOP firms. In addition to the total sample, we also use a matching- sample, which consists of 189 pairs of ESOP and non-ESOP firms matched by size, industry, and listing year. We examine multiple performance measures, including ROA, ROE, ROS, Tobin’s Q, productivity, and stock returns.
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Main Finding We obtain a consistent finding: There are no meaningful differences in performance between ESOP firms and non- ESOP firms. This finding is obtained for each of the performance measures we investigate, which holds in various robustness checks. Our results are unlikely to suffer from an endogeneity problem, but provide clean evidence for the role of ESOPs in employee motivation, uncontaminated by a tax-benefit effect.
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Conclusion When a firm’s sizable stock shares are allocated to a large number of employees, the resulting ownership is unavoidably highly diffused, and hence there is a serious free-rider problem. Therefore, employee ownership-based incentive schemes are ineffective.
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