Employee Stock Ownership Plans, Common Stock Wealth Effects and Stock Price Variability

Muhtaseb, Majed R.

doi:10.1108/eb018613

Cited by 2 publications

(3 citation statements)

References 9 publications

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“…The few studies that focus on debt or equity costs never examine the combined effect of the firm's cost of capital. As mentioned, Muhtaseb (1997) examines credit ratings of firms adopting leveraged versus non‐leveraged ESOPs while Clark et al (1997) examine firm's cost of equity only. We focus on three types of ESOP plans as well as the cost of equity, cost of debt, and the WACC.…”

Section: The Esop and Literature Reviewmentioning

confidence: 99%

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Analysis of the effects of ESOP adoption on the company cost of capital

Ivanov

Zaima

2011

Managerial Finance

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PurposeThe purpose of this study is to examine whether employee stock ownership plans (ESOPs) add or destroy value from a new perspective by examining the relation of the adoption of ESOP and the company cost of capital.Design/methodology/approachThe capital asset pricing model is used to estimate the company's cost of equity capital, and the cost of debt is estimated using bond yield spreads. The weighted average cost of capital (WACC) is calculated as the weighted percentage of the firm funded by equity, preferred stock, and debt multiplied by the individual costs of capital. Univariate and multivariate analyses are conducted around the event of adoption to determine if the cost of capital changes after the adoption of ESOP.FindingsResults from the univariate analysis show that firms adopting leveraged as well as non‐leveraged ESOP plans experience decreases in costs of equity and debt capital as well as decreases in their WACC. However, the multivariate analysis demonstrates that only the non‐leveraged common ESOPs are negatively correlated to cost of equity, cost of debt, and WACC. Robustness tests confirm that the reduction in the cost of equity capital drives the decline in WACC.Originality/valueThe findings contribute to the cost of capital literature and have implications for firms that decide to engage in ESOP plans. It is found that ESOPs benefit from decreased cost of capital related to the ability to increase debt capacity for the firm as well as the existing tax preferential treatments of ESOP plans.

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Section: The Esop and Literature Reviewmentioning

confidence: 99%

“…A more recent study by Muhtaseb (1997) examines credit ratings of firms adopting leveraged versus non‐leveraged ESOPs. He finds that the implementation of non‐leveraged ESOPs by BAA‐B credit‐rated firms adds value for shareholders and that leveraged ESOPs with AAA‐A credit rating have no effect on shareholder wealth.…”

Section: Introductionmentioning

confidence: 99%

Analysis of the effects of ESOP adoption on the company cost of capital

Ivanov

Zaima

2011

Managerial Finance

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“…roughout the existing literature on ESOP, scholars focus on the implementation motivation of ESOP [6][7][8], the shareholder wealth effects of ESOP [9][10][11], and the impact of ESOP on enterprise performance [12][13][14], but little attention is paid to the impact of ESOP on the cost of equity capital. Previous studies show that the cost of equity capital is mainly affected by the enterprise's own operating risk and information environment [15][16][17].…”

Section: Introductionmentioning

confidence: 99%

The Impact of Employee Stock Ownership Plan on the Cost of Equity Capital: Evidence from China

Cheng

2021

Discrete Dynamics in Nature and Society

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Due to the immaturity of bond market and the defects of internal governance structure, Chinese-listed companies have a strong preference for equity financing. How to reduce the cost of equity capital is particularly important for Chinese-listed companies. As an equity incentive system, employee stock ownership plan (ESOP) can reduce the agency conflicts among shareholders, executives, and employees to some extent. These reduced conflicts will, in an efficient capital market, be reflected in a lower cost of equity capital. This paper investigates whether the implementation of ESOP in a new era in China affects the cost of equity capital and further explores whether the impact of ESOP on the cost of equity capital is affected by the ownership nature, the firm size, and the contract design of ESOP. The results show that the implementation of ESOP reduces the cost of equity capital of enterprises. Compared with state-owned enterprises and large enterprises, the implementation of ESOP is more likely to reduce the cost of equity capital in non-state-owned enterprises and small enterprises. Furthermore, the reduction effect of ESOP on the cost of equity capital is influenced by the contract design of ESOP. This study not only enriches the literature on the relationship between employee stock ownership and the cost of equity capital but also provides a new idea for listed companies to reduce the cost of equity financing.

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Employee Stock Ownership Plans, Common Stock Wealth Effects and Stock Price Variability

Cited by 2 publications

References 9 publications

Analysis of the effects of ESOP adoption on the company cost of capital

Analysis of the effects of ESOP adoption on the company cost of capital

The Impact of Employee Stock Ownership Plan on the Cost of Equity Capital: Evidence from China

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