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Employee Capitalism or Corporate Socialism? Broad-Based Employee Stock Ownership

  • E. Han Kim
  • Paige Ouimet
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    How employee share ownership plans (ESOPs) affect employee compensation and shareholder value depends on the size. Small ESOPs, defined as those controlling less than 5% of outstanding shares, benefit both workers and shareholders, implying positive productivity gains. However, the effects of large ESOPs on worker compensation and shareholder value are more or less neutral, suggesting little productivity gains. These differential effects appear to be due to two non-value-creating motives specific to large ESOPS: (1) To form management-worker alliances ala Pagano and Volpin (2005), wherein management bribes workers to garner worker support in thwarting hostile takeover threats and (2) To substitute wages with ESOP shares by cash constrained firms. Worker compensation increases when firms under takeover threats adopt large ESOPs, but only if the firm operates in a non-competitive industry. The effects on firm valuation also depend on the strength of product market competition: When the competition is strong (weak), most of the productivity gains accrue to employees (shareholders). Competitive industry also implies greater job mobility within the industry, enabling workers to take a greater portion of productivity gains.

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    File URL: ftp://ftp2.census.gov/ces/wp/2009/CES-WP-09-44.pdf
    File Function: First version, 2009
    Download Restriction: no

    Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 09-44.

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    Length: 53 pages
    Date of creation: Dec 2009
    Date of revision:
    Handle: RePEc:cen:wpaper:09-44
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