How Employee Share Ownership Plans Impact Firms’ Market Value : A Conflict of Interest Theory Approach

We investigated whether the market places a higher value on banks with employee share ownership plans (ESOPs) than on those without them. Using a variety of empirical models, we found that ESOPs increased the market value of banks. However, this positive effect occured only when banks were transparent or located in countries with strong shareholder protection. Our findings demonstrated that if banks were opaque or shareholder protection was weak, outside investors’ concerns about managerial entrenchment in widely held banks and behind-the-scenes relationships between majority shareholders and managers in closely held banks outweighed the perceived benefits of ESOPs. Our study contributes to the literature by proposing a novel approach to study the effects of ESOPs through the prism of conflict of interest theory. Our findings also shed light on stakeholders’ rationales for opposing or adopting ESOPs