Do Employees Have Information on Firm’s Future Performance? Evidence from SEO and ESOP

Abstract

Using a sample of 576 equity right offerings announced between 2006 and 2015, this study analyzes the wealth effects of the discretionary or no allocation of new shares to Employee Stock Ownership Plan (ESOP) and the relationship between ESOP subscription rates and the long-run performance. The major results are as follows. First, for KOSPI firms that have obligation to allocate new shares to ESOP, those that do not allocate new shares have more negative announcement effects and long-run performance than those that do. Similarly, for KOSDAQ firms that have the discretion to allocate new shares to ESOP, those that allocate have less negative announcement effects and long-run performance than those that do not. Second, the significant positive relationship between ESOP subscription rates and long-run performance means that employees have significant information on the firms’ future prospects. Third, news on the large number of shares unsubscribed by ESOP provide negative information to the market. Firms in the top quartile of ESOP subscription rates outperform those in the bottom quartile by 27.54% in the year after purchase. Overall, ESOP members’ decisions regarding allocation and subscription provide valuable information on firm’s future performance.