Why do firms adopt employee ownership? An industry perspective

Abstract

PurposeThis paper offers a new perspective on the potential motivation for the adoption of employee ownership based on market power. Employee ownership may be linked to market power, either through contributing to firm growth that leads to market power or through industry leaders adopting employee ownership as part of rent sharing or a broader consolidation of market position. Both employee stock ownership plan (ESOP) coverage and product market concentration (PMC) have been increasing in the past two decades, providing a good opportunity to see if and how these are related.Design/methodology/approachThe authors predict ESOP adoption and termination using multilevel regressions based on 2002–2012 firm- and industry-level data from the Census Bureau, Compustat and Form 5500 pension datasets.FindingsThe authors find that the top four firms in concentrated industries are more likely to adopt Employee Stock Ownership Plans (ESOPs), while having an ESOP does not predict entering the top four, apart from firm-level predictors. Tests indicate the first result does not reflect simple rent sharing with employees but instead appears to reflect an effort by firms to consolidate market power through the attraction and retention (or “locking in”) of industry talent. Other positive predictors of ESOPs include company size, being in a high-wage industry and having a defined benefit (DB) pension.Research limitations/implicationsTo better distinguish among hypotheses, it would be helpful to have firm-level data on managerial attitudes, strategies, networks and monopsony measures. Therefore, future research using such data would be highly useful and encouraged.Practical implicationsThe paper includes implications for the potential usefulness of ESOPs in attracting and retaining talent and for the design of nuanced policy to encourage more broadly based sharing of economic rewards.Originality/valueWhile prior research focuses on firm-level predictors of employee ownership, this study uses market concentration and other industry-level variables to predict the use of ESOPs. This study makes a unique contribution, broadening the current thinking on firm motives and environmental conditions predictive of firm ESOP adoption.