ESOPs and corporate control

Lilli A. Gordon; John Pound

doi:10.1016/0304-405X(90)90066-9

ESOPs and corporate control

Lilli A. Gordon, John Pound

Research output: Contribution to journal › Article › peer-review

75 Scopus citations

Abstract

This paper examines the effects of employee stock ownership plans (ESOPs) on shareholder wealth. ESOPs established in the presence of takeover activity reduce share values, by approximately 4% on average. ESOPs also reduce share values if they are structured to transfer control away from outside shareholders, by creating a new ownership block with veto power over takeover bids. Large ESOPs established with nonvoting stock, so as to preclude any immediate control transfers, result in a significant increase in share values. The wealth effect of any given ESOP thus depends upon both its incentive and control effects on the corporation.

Original language	English (US)
Pages (from-to)	525-555
Number of pages	31
Journal	Journal of Financial Economics
Volume	27
Issue number	2
DOIs	https://doi.org/10.1016/0304-405X(90)90066-9
State	Published - Oct 1990
Externally published	Yes

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

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10.1016/0304-405X(90)90066-9

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title = "ESOPs and corporate control",

abstract = "This paper examines the effects of employee stock ownership plans (ESOPs) on shareholder wealth. ESOPs established in the presence of takeover activity reduce share values, by approximately 4% on average. ESOPs also reduce share values if they are structured to transfer control away from outside shareholders, by creating a new ownership block with veto power over takeover bids. Large ESOPs established with nonvoting stock, so as to preclude any immediate control transfers, result in a significant increase in share values. The wealth effect of any given ESOP thus depends upon both its incentive and control effects on the corporation.",

author = "Gordon, {Lilli A.} and John Pound",

note = "Funding Information: *This research was supported by Analysis Group, Inc. and the Corporate Voting Research Project at Harvard University. We thank participants in the Conference on the Structure and Governance of Enterprise at the Harvard Business School and particularly Leo Herzel (the discussant) for helpful comments and suggestions. We also thank Michael Jensen (the editor) and Harry DeAngelo (the referee). Kate Ayotte and Darryl1 Hendricks provided diligent research assistance.",

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AU - Gordon, Lilli A.

AU - Pound, John

N1 - Funding Information: *This research was supported by Analysis Group, Inc. and the Corporate Voting Research Project at Harvard University. We thank participants in the Conference on the Structure and Governance of Enterprise at the Harvard Business School and particularly Leo Herzel (the discussant) for helpful comments and suggestions. We also thank Michael Jensen (the editor) and Harry DeAngelo (the referee). Kate Ayotte and Darryl1 Hendricks provided diligent research assistance.

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N2 - This paper examines the effects of employee stock ownership plans (ESOPs) on shareholder wealth. ESOPs established in the presence of takeover activity reduce share values, by approximately 4% on average. ESOPs also reduce share values if they are structured to transfer control away from outside shareholders, by creating a new ownership block with veto power over takeover bids. Large ESOPs established with nonvoting stock, so as to preclude any immediate control transfers, result in a significant increase in share values. The wealth effect of any given ESOP thus depends upon both its incentive and control effects on the corporation.

AB - This paper examines the effects of employee stock ownership plans (ESOPs) on shareholder wealth. ESOPs established in the presence of takeover activity reduce share values, by approximately 4% on average. ESOPs also reduce share values if they are structured to transfer control away from outside shareholders, by creating a new ownership block with veto power over takeover bids. Large ESOPs established with nonvoting stock, so as to preclude any immediate control transfers, result in a significant increase in share values. The wealth effect of any given ESOP thus depends upon both its incentive and control effects on the corporation.

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ESOPs and corporate control

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