Employee stock ownership and cost of capital: Evidence from the S&P 500

• DOI: http://doi.org/10.1002/jcaf.22449
• Author: Alexander Kern,Domenico Campa
• Date: 01 July 2020
• Published date: 01 July 2020

BLIND PEER REVIEW

Employee stock ownership and cost of capital: Evidence

from the S&P 500

Domenico Campa

1

| Alexander Kern

2

1

Department of Economics, Finance and

Accounting, INSEEC U Research

Laboratory, International University of

Monaco, 14, Rue Clerissi, Monaco, 98000,

Principality of Monaco

2

Department of Management,

International University of Monaco, 14,

Rue Clerissi, Monaco, 98000, Principality

of Monaco

Correspondence

Domenico Campa, INSEEC U Research

Laboratory, International University of

Monaco 14 Avenue Clerissi, 98000

Monaco, Principality of Monaco.

Email: dcampa@inseec.com

Abstract

This article investigates whether the presence of employee stock ownership

(ESO) is associated with a firm's cost of capital. Based on all of the S&P

500 firms, we find that ESO decreases the overall cost of capital in entities by

reducing their cost of debt. In contrast, we find no strong relationship between

ESO and the cost of equity. We also show that ESO provides a company with

immunity to changes in the cost of capital observed during financial crises. We

conclude that external providers of funds associate ESO with a lower financial

risk, and that equity investors balance the positive effects of ESO, such as

increased employee motivation and commitment, with the negative effects

arising from management entrenchment and dilution in property rights. Over-

all, we show that ESO reduces a firm's perceived financial risk. Our results also

encourage managers to involve their employees in the life of the business by

granting them company shares.

KEYWORDS

agency costs, agency theory, cost of capital, employee ownership, financial crises

JEL CLASSIFICATION

C33; G30; M12; M54

1|INTRODUCTION

Numerous internal and external parties are involved in a

firm's activities, including executives, managers,

employees, suppliers, the state, and local communities.

These actors fall under the term “stakeholders.”Their

interconnecting presence indicates the existence of a

highly complex environment within which companies

operate, especially compared to their simplified legal

description. This multifaceted business is becoming more

problematic because stakeholders are increasingly

appointing active representatives to speak on their behalf

to relay their expectations concerning a firm's goals and

their perspective on strategies for achieving them.

This article focuses on one very important stakeholder

group: Employees. The active engagement of employees is

a necessary condition for business success (Anand, 2017).

Kruse, Freeman, and Blasi (2010, p. 6) define shared capi-

talism as “employment relations where the pay or wealth

of workers is directly tied to workplace or firm perfor-

mance”and Blasi and Kruse (2006) have suggested that

shared capitalism reduces the conflicts of interest between

employees and employers. In the US, the most common

and effective way to share a company's achievements and

profits with its employees is through employee stock own-

ership (hereafter ESO). ESO is a strategy which consists of

offering shares in a company to its employees. This system

is often used as a management strategy for corporate

finance, but it is also a tool that increases employee wel-

fare and benefits, in turn creating a more committed and

motivated staff (Gamble, Culpepper, & Blubaugh, 2002;

Kruse et al., 2010; Kruse, Blasi, & Freeman, 2012).

Received: 16 December 2019 Revised: 5 May 2020 Accepted: 11 May 2020

DOI: 10.1002/jcaf.22449

150 © 2020 Wiley Periodicals, Inc. J Corp Acct Fin. 2020;31:150–162.wileyonlinelibrary.com/journal/jcaf