Selling Company Shares to Reluctant Employees: France Télécom's Experience

In 1997, France Télécom, the state-owned French telephone company, went through a partial privatization. The government offered current and prior France Télécom employees the opportunity to buy portfolios of shares with various combinations of discounts, required holding periods, leverage, tax treatment, and levels of downside protection. We adapt a neoclassical model of investment decisionmaking that takes into account firm-specific human capital and holding period restrictions to predict how employees might respond to the share offers. Using a database that tracks over 200,000 eligible participants, we analyze the employees' characteristics and their decisions whether to participate; how much to invest; and what form of stock alternatives they selected. The results are broadly consistent with the neoclassical model. However, we report four anomalous findings: (1) The firm specificity of human capital has a negligible effect on employees' investment decisions; (2) the amount of funds invested in the stock plans seems driven by a different set of forces than the decision to participate, which we suspect reflects a "threshold effect" that we attempt to measure; (3) employees "left on the table" benefits equal to one to two month's salary by failing to participate; and (4) most potential participants underweighted the most valuable asset, a decision hard to reconcile with rational portfolio choice.