Employee ownership and corporate investment efficiency in Europe

Abstract

We investigate the effect of non-executive employee ownership (EO) on the efficiency of investment decisions for a sample of non-financial European firms over the period 2006–2017. We find a positive (negative) association between EO and investment for firms that are more likely to underinvest (overinvest). In addition, we find the impact of EO on underinvestment and overinvestment to be more pronounced for firms with lower analyst following and lower blockholding ownership. Overall, our findings suggest that employee ownership increases firm-level investment efficiency through two channels: reduced information asymmetry and improved monitoring of management. The results hold after using an alternative specification of investment efficiency, Heckman's two-stage procedure, instrumental variable regressions, and alternative proxies for information asymmetry and monitoring of management both at the firm and the country level.