ESOPs and corporate control

John Pound

This paper examines the effects of employee stock ownership plans (ESOPs) on shareholder wealth. ESOPs established in the presence of takeover activity reduce share values, by approximately 4% on average. ESOPs also reduce share values if they are structured to transfer control away from outside shareholders, by creatin g a new ownership block with veto power over takeover bids. Large ESOPs established with nonvoting stock, so as to preclude any immediate control transfers, result in a significant increase in share values. The wealth effect of any given ESOP thus depends upon both its incentive and control effects on the corporation.

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