Analysis of the effects of ESOP adoption on the company cost of capital

Purpose – The purpose of this study is to examine whether employee stock ownership plans (ESOPs) add or destroy value from a new perspective by examining the relation of the adoption of ESOP and the company cost of capital.Design/methodology/approach – The capital asset pricing model is used to estimate the company's cost of equity capital, and the cost of debt is estimated using bond yield spreads. The weighted average cost of capital (WACC) is calculated as the weighted percentage of the firm funded by equity, preferred stock, and debt multiplied by the individual costs of capital. Univariate and multivariate analyses are conducted around the event of adoption to determine if the cost of capital changes after the adoption of ESOP.Findings – Results from the univariate analysis show that firms adopting leveraged as well as non‐leveraged ESOP plans experience decreases in costs of equity and debt capital as well as decreases in their WACC. However, the multivariate analysis demonstrates that only the non‐...

[1]  Michael S. Knoll.  Samuel Zell, the Chicago Tribune, and the Emergence of the S ESOP: Understanding the Tax Advantages and Disadvantages of S ESOPs , 2008 .

[2]  S. Oswald,et al.  ESOPs, takeover protection, and corporate decision-making , 1999 .

[3]  G. Philippatos,et al.  Employee stock ownership plans (ESOPs): an international comparison and analysis , 1998 .

[4]  R. E. Shrieves,et al.  Employee Stock Ownership Plans and Corporate Control , 1997 .

[5]  M. R. Muhtaseb.  Employee Stock Ownership Plans, Common Stock Wealth Effects and Stock Price Variability , 1997 .

[6]  Joseph R. Blasi,et al.  Employee Stock Ownership and Corporate Performance among Public Companies , 1996 .

[7]  Sang-Seob Park,et al.  Employee Stock Ownership Plans, Firm Performance, and Monitoring by Outside Blockholders , 1995 .

[8]  Thomas J. Zwirlein,et al.  ESOPS IN PUBLICLY HELD COMPANIES: EVIDENCE ON PRODUCTIVITY AND FIRM PERFORMANCE , 1995 .

[9]  Greg Niehaus,et al.  The Role of ESOPs in Takeover Contests , 1994 .

[10]  G. Ramírez,et al.  Employee stock ownership and corporate control: An empirical study , 1994 .

[11]  Saeyoung Chang.  Employee Stock Ownership Plans and Shareholder Wealth: An Empirical Investigation , 1990 .

[12]  Myron S. Scholes,et al.  Employee Stock Ownership Plans and Corporate Restructuring: Myths and Realities , 1989 .

[13]  Andrew H. Chen,et al.  BEYOND THE TAX EFFECTS OF ESOP FINANCING , 1988 .

[14]  Louis H. Ederington,et al.  The Informational Content of Bond Ratings , 1984 .

[15]  Merton H. Miller.  The Cost of Capital, Corporation Finance and the Theory of Investment , 1958 .