AN EMPIRICAL INVESTIGATION OF THE IMPLICATIONS OF EMPLOYEE OWNERSHIP FOR THE AGENCY PROBLEM AND THE INFORMATION CONTENT OF EARNINGS

This dissertation examines the association between firm performance and the ownership stake of employees of the firm. It has two objectives: (1) to assess the impact of employee ownership on the agency problem, which arises from separation of ownership and control of the firm, and (2) to investigate the implications of employee ownership for the information content of earnings.; Prior research (Faria et al., 1993, Conte, 1992, Rosen, 1990, Bloom 1985) indicates that employee stock ownership plans (ESOPs) do not achieve the objectives of a performance-enhancing benefit plan. However, evidence suggests that ESOPs are being used to increase management's effective level of control of the firm without increasing its ownership stake.; One explanation for prior studies' failure to document a significant association between firm performance and employee ownership is that the time horizons used to measure performance are too short for the alleged performance-enhancing benefits of the ESOP to be realized. To address this concern, this dissertation is designed as a long-term association study. For each firm in the ESOP sample, a control (non-ESOP) firm is selected by matching on industry and size. Longitudinal data for ninety-six pairs of public firms comprise the data set.; The pre-adoption and post-adoption performance of the ESOP firms is compared to that of the non-ESOP firms. A series of nonparametric tests provides no evidence that ESOPs improve firm performance. However, results are consistent with ESOPs being used by management as corporate control devices. The overall conclusion is that ESOPs do not mitigate the agency problem.; Warfield et al. (1995) assert that the separation of ownership and control of the firm affects the information content of earnings. They document a positive association between managerial ownership and the earnings response coefficient (ERC). Although stock price reactions to ESOP adoptions suggest that changes in the level of employee ownership contain value-relevant information, no study to date has examined the impact employee ownership on the information content of earnings. This dissertation builds on the results of Warfield et al. (1995). It is the first study to provide evidence that the presence of an ESOP has a positive impact on the ERC and that this effect becomes weaker as the ESOP matures. The results of empirical tests of the relationship between managerial ownership and the earnings response coefficient are mixed.