Employee stock ownership and the cost of capital

Nicolas Aubert (1, 2) , Alexander Kern (1) , Xavier Hollandts (3)

1 CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille
2 AMU IAE - Institut d'Administration des Entreprises (IAE) - Aix-en-Provence
3 CRCGM et IFGE - Kedge Business School

This paper investigates the relationship between employee stock ownership and the cost of capital, the main determinant of shareholder value creation computed through economic value added (EVA). By reducing agency conflicts within the firm, we hypothesize that employee share ownership reduces the firm's cost of capital by affecting its two components, i.e. the cost of equity and the cost of debt. We test this hypothesis in France, a leading country in terms of employee ownership, based on a panel of the 120 largest listed companies for the 2000-2011 period. We find: (i) no significant relationship between employee stock ownership and the cost of equity; (ii) a negative curvilinear relationship between employee stock ownership and the cost of debt; (ii) a negative curvilinear relationship relationship between employee stock ownership and the weighted average cost of capital. These results suggest debtholders regard ESO as positive as long it is moderate because it shifts risk from them to employees and that this effect is still perceptible in the weighted average cost of capital.

Mots clés: Shared capitalism; employee ownership; corporate governance; cost of equity; cost of debt; cost of capital; agency conflicts

Domaines: Economies et finances

Nicolas Aubert, Alexander Kern, Xavier Hollandts. Employee stock ownership and the cost of capital. Research in International Business and Finance, 2017, ⟨10.1016/j.ribaf.2017.04.007⟩. ⟨halshs-01502001v2⟩