New Research on ESPPs

In their paper "Do Non-Executive Employees Have Information? Evidence from Employee Stock Purchase Plans," Ilona Babenko at Arizona State University and Rik Sen at Hong Kong University of Science and Technology find that higher participation in employee stock purchase plans (ESPPs) predicts higher future stock prices.

Babenko and Sen looked at 10-K filings for 1,000 companies and found 460 firms that had ESPPs over the entire 10 years. They found that "each year companies issue on average 0.30% of their outstanding shares for purchase by employees in these plans. Employees' annual ESPP contributions average $22.1 million per year or approximately $1,630 per employee. Although we do not have comprehensive data on participation in ESPPs (other than share issuance), the participation rate for companies that voluntarily report is less than 40% on average."

Over the 10-year period, the authors found that the stock price of the companies with above-median employee purchases had subsequent annual stock price increases of 6% to 8% more than those in the bottom half, with most of the predictive power occurring in the subsequent first and second years. The authors conclude that the likely explanation is that employees may have better information about the future of the company than outside investors. This finding is reinforced by the fact that the relationship between participation in the plans and future stock price is stronger in smaller companies, where employees presumably have more knowledge about the company relative to investors than is the case for larger companies where there is more public information available.