The Productivity Effects of Employee Stock-Ownership Plans: Evidence from Panel Data of Taiwan Electronic Companies

Article excerpt

I report the results for Taiwan electronic firms on the effects of employee stock-ownership plans (ESOP's) by estimating production functions using panel data. I find that the introduction of an ESOP will lead to a 4-5 percent increase in productivity; this productivity payoff takes 3-4 years. Also, these results are independent of the particular specification of production technology.

I. Introduction

Employee stock-ownership plans of Taiwan electronic companies received substantial attention in the last decade. During that time, employee ownership of stock in electronic companies became widespread. An estimated 80.9 thousand employees in 2000, spread across 1,000 companies, were participants that held more than 5% of company's stock.1

Taiwan ESOP's are perhaps best understood by comparing their main features with the better-known U.S. ESOP's. Unlike U.S. ESOP's, Taiwan corporations establishing an ESOP don't receive any tax incentive to do so. To induce individual employees to participate in the ESOP, companies offer great subsidies. Usually employee can purchase stock with face value when companies issue new stock or ex-right dividend.

Employee stock ownership as instrument for improving productivity have been introduced in many western economics, including United States, Britain, and Germany since the late 1970. The theoretical aspects of economic implications of employee stock ownership have been extensively discussed (Weitzman, 1983, 1985). There are also many case studies focusing on the relationship between employee stock ownership and productivity (Bhargava, 1994; Cable and Wilson, 1989,1990; Kruse, 1992, 1993; Fitzroy and Kraft, 1987; Jones, 1993; and Jones and Kato, 1995). Other authors have found similar evidence but argue that it is unclear whether employee stock ownership is the cause or the outcome of better performance (Wadhwani and Well, 1996; Blanchflower and Oswald, 1987, 1988). Most authors use a Cobb-Douglas (CD) production function to investigate whether employee stock ownership has a positive effect on productivity.

In this paper, a production function approach is adopted to measure the impact of employee stock ownership plan on the productivity of electronic companies in Taiwan over 1993-2000. I begin with the simplest OLS (ordinary least squares) Cobb-Douglas case (with fixed effects) under the assumption that the productivity effect of employee stock ownership is best captured by a dummy variable indicating whether or not an employee stock ownership plan exists. I then examine whether, and how much, the results change when: (i) one uses the translog specification2; and (ii) one uses IV (instrumental variables) to account for the endogeneity of labor and capital inputs. I repeat the same analysis under an alternative assumption that the productivity effect of employee stock ownership is best captured by a continuous measure gauging variation in the extent of the existing employee stock ownership system.

A pooled data set of some 100 electronic companies over 1993-2000 taken from Taiwan stock market annual report is used to estimate the model. I find consistently for all specifications that employee stock ownership plan has a positive impact on productivity. Further, it takes 3-4 years for the productivity payoff.

The paper is organized as follows. In the next section, I offer theoretical arguments for the productivity effects of ESOP's. Section 3 discusses models and data, while section 4 presents my specifications and empirical results. Finally, section 5 draws some conclusion.

II. Productivity Effects of ESOP's: Hypotheses

Formal economic theory is ambiguous as to the expected impact of alternative compensation schemes (including employee stock ownership) on firm performance (For review, see the essays in Blinder [1996]). However, Avner Ben-Ner and Jones (1997) stated that the introduction of an ESOP will arguably be expected to have net positive effects on individual behavior, collective behavior, and ultimately organizational performance. …