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Sorting, incentive, and investment effects of employee stock ownership

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  • Kim, Kyoung Yong
  • Patel, Pankaj C.
  • Devaraj, Srikant

Abstract

Employee ownership literature has made significant advancements over the last four decades. However, whether higher-quality employees are more or less attracted to firms with employee stock ownership plans (ESOP) has remained a long-lasting question since Blasi et al. (1996) raised this self-selection issue. In this study, we carry out two studies with samples of 274 and 56,266 employees respectively in the United States to examine whether higher-quality employees prefer ESOP firms (i.e., the sorting effect) and what its consequences are. We theorize and find that there is a curvilinear relationship between employees’ human capital and their selection of ESOP firms. Specifically, while higher-quality employees tend to opt for ESOP firms, the highest quality employees are inclined to choose non-ESOP firms (Studies 1 and 2). We also find that ESOP firms are positively associated with higher compensation (i.e., the investment effect) as well as higher work effort (i.e., the incentive effect) (Study 2). These findings suggest that employee ownership indeed influences a sorting effect and based on it, the higher-quality employees, not the highest quality, enjoy working in ESOP firms with higher compensation.

Suggested Citation

  • Kim, Kyoung Yong & Patel, Pankaj C. & Devaraj, Srikant, 2025. "Sorting, incentive, and investment effects of employee stock ownership," Journal of Business Research, Elsevier, vol. 191(C).
    • Handle: RePEc:eee:jbrese:v:191:y:2025:i:c:s0148296325001006
    DOI: 10.1016/j.jbusres.2025.115277
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