New Study Finds Negative Performance Effect for ESOPs in Public Firms

A new study by Mary Ducy and Zahid Igbal of Texas Southern University, and Aigbe Akhigbe of Florida Atlantic University, concludes that ESOPs have a negative effect on corporate performance in public firms, although stockholders tend to view ESOP announcements favorably.

The study measured operating cash flows relative to a company's market assets, sales, and number of employees. The study looked at ESOPs with at least 10% ownership that had been in place since 1990 or earlier. The final sample included 48 firms. Results were evaluated based on the difference between pre-ESOP and post-ESOP performance relative to industry norms.

The researchers found that performance declined in about 60% to 65% of the cases, depending on the measure, with a median decline of about 1% to 2%. Only a few of the measures produced statistically significant results, however (that is, results that clearly were not random). When the sample looked at companies with over 15% ESOP ownership, the pattern was less clear, but still somewhat negative. On the other hand, stock prices rose about 1.6% after the ESOP announcement.

The results are contrary to a recent study by Don Collat at Harvard who found a small, statistically significant performance improvement in public company ESOPs in those firms that were not takeover candidates. The Ducy et al. study also looked at this factor but found it did not change the results.