The Employee Ownership Update
October 30, 1998
New Study Shows ESOPs Improve Performance in Public CompaniesA new study by Hamid Mehran of Northwestern University for Hewitt Associates has found that ESOPs in 382 publicly traded companies increased the return on assets (ROA) 2.7% over what would otherwise have been expected. The study looked at financial returns of the companies for two years before the plan's implementation and four years after. Each company was compared to industry norm ROA figures for both periods. Mehran also found that for the 303 ESOP companies surviving the entire four-year post-ESOP study period, ROA was 14% higher than the comparison group scores, while for the 382 companies as a group, ROA was 6.9% higher for the four-year period. Over 60% of the companies experienced an increase in their stock price in the two-day period following announcement of the ESOP, with the average increase for all companies at 1.6%. This suggests the stock market now reacts positively to ESOPs, a change from the pattern in the 1980s when ESOP announcements were often seen as an indicator a company was trying to prevent a hostile takeover.
The study also included results from a qualitative survey of 230 companies on ownership culture issues. 82% of the executives reported that sharing ownership increased corporate performance, but only 18% said that it increased ownership behavior among non-managers. 85% of the companies reported increased access to company information for employees, including financial information, business unit strategies, corporate strategies, and customer expectations.
The study is the largest yet undertaken of ESOPs in public companies. These results are the first phase of as much more detailed project now underway.
The most recent academic analysis of ESOPs in public companies came to a different conclusion. Gary Florkowski, Karen Shastri, and Kuldeep Shastri reported their results in the "Working Paper Series" of Carnegie Mellon University (January 1995). They looked at financial and employment data for 159 publicly traded companies that set up ESOPs between 1973 and 1989. They found the companies had lower profitability than their peers prior to setting up an ESOP and continued this relatively poor performance after the plan was in place. While some measures, such as employee retirement assets and stock returns, improved in the post-ESOP period, in general, the differences between the pre- and post-ESOP periods were not significant.
The generally negative findings on ESOPs in public companies that have been reported before the Mehran study may be related to the fact that Mehran's sample includes more recent adopters. Anecdotally, it seems that public companies have been late adopters of "employee ownership culture" programs relative to their private company counterparts. Because research shows that these cultural attributes are what make ownership effective, it may be only now that some positive results are being reported.