Employee stock ownership and cost of capital: Evidence from the S&P 500. Issue 3 (3rd June 2020)

• Record Type: Journal Article
• Authors: Campa, Domenico; Kern, Alexander
• Is Part Of: Journal of corporate accounting & finance. Volume 31:Issue 3(2020)
• Page Start: 150
• Page End: 162
• Publication Date: 2020-06-03
• Subjects: agency costs -- agency theory -- cost of capital -- employee ownership -- financial crises; Accounting -- Periodicals; Accounting -- Law and legislation -- United States -- Periodicals; Corporations -- United States -- Finance -- Periodicals; Corporations -- United States -- Accounting -- Periodicals; 657
• DOI: 10.1002/jcaf.22449
• Languages: English
• ISSNs: 1044-8136

Abstract

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. Overall, 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.