Can Employee Stock Ownership Programs Promote Financial Innovation in Chinese State-Owned Enterprises?

ABSTRACT: China aims to be the foremost innovator in the world by 2035 and is attempting to further reform its state-owned enterprises (SOEs) and make them more innovative by introducing Employee Stock Ownership Programs (ESOPs). The main purpose of this study is to explore the impact of ESOPs on promoting financial innovation in Chinese SOEs. In order to investigate the impact of ESOPs on innovation, the study uses a multi-period double-difference model as not only it helps to examine whether there is a significant difference between the changes in innovation in Chinese firms after the implementation of ESOPs, but also it addresses the possible endogeneity issues arising from the explanatory variables and from the omitted variable bias. ESOPs' age, size, and current ratio of a firm and compensation of employees are used as mediating variables to see how ESOPs' policy initiatives affect innovation in Chinese SOEs under different circumstances. The data collected for the analysis range from 2010 to 2021. The findings of the study suggest that ESOPs increase innovation in SOEs by promoting R&D investment and patent output, especially in those firms where employees are highly compensated and where short-term liabilities are under control. Chinese SOEs which implemented ESOPs spend more on R&D and produce more patents compared to those SOEs which did not implement ESOPs. The study also reports that supportive environments such as better compensation, age of ESOPs, and size of the firm play a crucial role in the efficacy of ESOPs in promoting innovation. Employee stock ownership is a powerful tool to improve organizational innovation performance and successful implementation of ESOPs and their impact on innovation requires a supportive and conducive environment. ESOPs' implementation can provide a good point for Chinese SOEs to ameliorate their rigid structure and stand on their own foundations. Thus, the study provides valuable insights for policymakers and businesses, paves a way for other SOEs to take informed decisions on ESOPs, and serves as an important reference for other countries seeking to enhance the innovation of their own SOEs since ESOPs can help SOEs to retain and fully utilize the potential of the skilled employees and promote innovation.