Stock Price and Operating Performance of ESOP Firms: A Time-Series Analysis
Iqbal, Zahid, Hamid, Shaikh Abdul, Tin, Jan, Quarterly Journal of Business and Economics
Prior literature suggests that the impact of employee ownership on employee behavior may depend on the financial rewards associated with ownership. As the financial value of ownership accounts increases, employee attitudes become more positive, which, in turn, improves organizational performance. In this paper, we explore this financial perspective of employee ownership by examining the relationship between stock price and operating performance of ESOP firms. Using aggregate quarterly data, we find that large increases in stock prices result in improved operating performance for ESOP firms. Our findings are, however, anomalous for ESOP firms that experience falling stock prices. Contrary to our expectation, these firms show improvement in operating performance. Overall, we provide new evidence that stock return is an important link in the ownership-performance relationship. Corporate planners and public policy makers may assess ESOP 's contribution to corporate performance in relation to company 's stock retu rns.
Prior empirical studies observe positive effects of an employee stock ownership plan (ESOP) on a firm's operating performance (Park and Song, 1995; Blasi, Kruse, and Conte, 1992; Conte and Tannenbaum, 1978; Marsh and McAllister, 1981; Rosen and Klein, 1983; Quarrey, 1987; U.S. General Accounting Office, 1988; Rooney, 1990; and Wagner and Rosen, 1985). Klein (1987) identifies three theoretical perspectives that relate employee ownership to employee behavior and firm performance. The intrinsic satisfaction model suggests that the effects of employee ownership result directly from ownership. The instrumental satisfaction model proposes effects of ownership through employee participation. The extrinsic satisfaction model suggests that employee ownership increases organizational commitment and performance if ownership is financially rewarding to employees. This idea of financial orientation is raised by French (1987) who argues that employees may approach ownership system with strictly an investment expectation. This view is also consistent with Jensen and Meckling's (1976) agency theory that financial incentives such as employee ownership may make the interests of the employees align with those of the stockholders.
In this paper, we explore the financial perspective of employee ownership by empirically examining the relationship between stock returns and operating performance of ESOP firms. We take the view that company stock price affects the value of the ESOP accounts, which in turn influences organizational commitment and productivity of the employees. Specifically, employees of the ESOP firm will be more (less) committed and productive in the workplace if stock appreciates (declines) in value thus improving (reducing) operating performance. 
Our data show a positive relationship between stock price and subsequent operating performance of ESOP firms. Further analysis indicates that this positive relationship is true for ESOP firms with large price appreciations. The relationship between stock returns and operating performance is insignificant when stock prices change modestly, and it is negative when prices decrease substantially.
Background and Hypotheses
An ESOP is a deferred employee benefit plan through which employees acquire company stock. An ESOP company donates stock, or cash to buy stock, to an ESOP trust. The stock is allocated to individual employee accounts, usually based on the employee's salary level. The trust account of the employees increases in value through employer contributions and through appreciation in the price of the company stock.
Advocates of employee ownership claim that ESOPs increase employee commitment and productivity. Smith, Lazarus, and Kalkstein (1990) state that ESOPs represent a potential employee motivator and morale booster. Webb (1912) speculates that by making [an employee] a shareholder in the business employing him . …