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Employee stock ownership and cost of capital: Evidence from the S&P 500
Author(s) -
Campa Domenico,
Kern Alexander
Publication year - 2020
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22449
Subject(s) - cost of capital , business , equity (law) , stock (firearms) , implicit cost , monetary economics , equity capital , finance , economics , accounting , profit (economics) , capital market , microeconomics , total cost , mechanical engineering , political science , law , engineering
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.