Employee Stock Ownership and Cost of Capital: Evidence from the S&P 500
This article investigates whether the presence of employee stock ownership (ESO) is associated with a firm's cost of capital. Based on all of the S&P 500 firms, we find that ESO decreases the overall cost of capital in entities by reducing their cost of debt. In contrast, we find no strong relationship between ESO and the cost of equity. We also show that ESO provides a company with immunity to changes in the cost of capital observed during financial crises. We conclude that external providers of funds associate ESO with a lower financial risk, and that equity investors balance the positive effects of ESO, such as increased employee motivation and commitment, with the negative effects arising from management entrenchment and dilution in property rights. Overall, we show that ESO reduces a firm's perceived financial risk. Our results also encourage managers to involve their employees in the life of the business by granting them company shares.