Employee Stock Ownership Plans, Firm Performance, and Monitoring by outside Blockholders

Employee Stock Ownership Plans (ESOPs) tend to entrench incumbent managers and enhance employee incentives, so the effect of an ESOP on the sponsoring firm is important. We examine long-term performance of ESOP firms and find significant improvement in their year-end performance. This finding supports the positive effects of ESOPs on the performance of the firm overall. We hypothesize that the performance of the ESOP depends on the efficiency of the ownership structure of the firm as a monitoring mechanism. Evidence consistent with our hypothesis is found in the average long-term firm performance.