The Effects of ESOPs on Companies’ Performance in China

(1)

The Effects of ESOPs on

Companies’ Performance in China

MS-IFM Zhe Guo

S1809830

(2)

List of Contents

1. Introduction………1

2. The Working of an Employee Stock Ownership Plan (ESOP)………..2

3. ESOP in China………....5

3.1 Development of ESOP in China………...5

3.2 The Characteristics of ESOPs in China………8

4. Literature Review……….11

5. Data and Methodology……….13

5.1. Data Sources………..15

5.1.1. Dependent variables………...15

5.1.2. Independent variables……….15

5.2. Methodology ……….18

6. Empirical results………...20

6.1. Distinctive characteristics of ESOP companies……….20

6.2. Performance Determinants………22

7. Conclusion………26

(3)

1

1. Introduction

An Employee Stock Ownership Plan (ESOP) is an employee benefit plan which makes the employees of a company owners of stock in that company (ESOP Association, 2010). Till now, much speculation surrounds the contention of the relationship between the establishment of an ESOP and post-adoption improvements in financial performance. Most of the research on the effect of ESOPs on performance and productivity has been done for western countries. Several previous researches have found that employee ownership has a signiﬁcant positive impact on ﬁrm economic performance (Conte and Tannenbaum, 1978; Quarrey and Rosen, 1987; Park and Song, 1995; Trebucq, 2004).

Before 1980s, China was considered to have a socialist form of economic structure, companies were officially owned by „the whole people‟. Although management hierarchies exist in these enterprises, workers have considerable power. They exercise their rights by electing members to the Worker Congress and exert their influence on issues such as long-term planning, welfare and labour protection, appraisals of managers‟ performance and by the election of enterprise-level directors (Tang et al., 1996). Hence, enterprise leaders can not overlook the importance of workers and their interests. This arrangement sounds ideal, except that no one in these enterprises enjoys tangible gains as an owner and few are willing to make an effort to their jobs and the enterprise. Over one-third of Chinese companies are showing losses, while the number of failing companies is increasing every year (Financial Times, 1997). This was the context within which enterprises reform took place and ESOP was introduced to China. As years past, more and more Chinese companies try to attract and motivate talents by adopting ESOP, so to improve companies‟ performance. However, till now, the effectiveness of ESOP in China has yet to be ascertained. This brings me the motivation to investigate:

What Influence Has ESOP on Companies’ Performance in China

?

which is also the main research question of this paper.

(4)

2

unexploited Chinese data. This research examines the effect of ESOP adoption on the performance of Chinese companies. In the following sections, I first present how an ESOP works, following by the development and main characteristics of ESOP in china. After a brief literature review in part 4, section 5 and 6 show the empirical findings, obtained from a sample of 289 Chinese companies. Among these, 66 have an ESOP. I examine the correlation between ESOPs and performance indicators, while controlling for age, size, sector, or leverage. The conclusion will be given at the end.

2. The Working of an Employee Stock Ownership Plan (ESOP)

(5)

3

Chart 1. How an ESOP Works

LENDER

(Bank or Owner)

THE

COMPANY

SELLING

OWNER

ESOP

TRUST

LOAN PAYMENT LOAN _CASH P A Y ME NT STOCK $$$

SINKING

FUND

EMPlOYEES

CASH STOCK VE STI NG REPURCHASE LIABILITY RETIRE,LEAVE,DEATH&DISABILITY

LENDER

(Bank or Owner)

THE

COMPANY

SELLING

OWNER

SINKING

FUND

EMPlOYEES

LENDER

(Bank or Owner)

THE

COMPANY

SELLING

OWNER

ESOP

TRUST

SINKING

FUND

EMPlOYEES

LENDER

(Bank or Owner)

THE

COMPANY

SELLING

OWNER

SINKING

FUND

EMPlOYEES

*How an ESOP Works, by Andrew Shapiro, 2007

(6)

4

years of service, some combination of compensation and years of service, and equally, have all been used (The ESOP Association, 2010). Typically employees might join the plan and begin receiving allocations after completing one year of service with the company, where any year in which an employee works at least 1000 hours is counted as a year of service. When the employees leave the company because of retirement, disability or death, they receive a cash payment from the company equal to the value of their ESOP account in exchange for the stock shares.

ESOP is a mechanism to transfer stock broadly to employees. Within this framework, there are two types of ESOPs, „non-leveraged‟ and leveraged‟. Companies with non-leveraged ESOP do not borrow through the plan. In this model, the employer simply contributes stock or cash to buy stock to the ESOP, and deducts the value of the contribution from the company‟s tax liability (Corey, 1982). In the leveraged ESOP, a ESOP trust is used to borrow funds. Usually, the company sets up the ESOP first, and goes to the bank or creditor to get the loan. The company should guarantee that it will provide the ESOP with sufficient funds to repay the loan. Then, the ESOP takes the loan and buys stock, either newly-issued shares or the shares of an existing owner. The company makes contributions to the ESOP in amounts sufficient to pay off the loan, and the stock is allocated to the accounts of employees.

Private companies must have an annual outside valuation to determine the price of their shares. In private companies, employees must be able to vote their allocated shares on major issues, such as closing or relocating, but the company can choose whether to pass through voting rights (such as for the board of directors) on other issues. In public companies, employees must be able to vote all issues (NCEO, 2010).

(7)

5

be risk neutral but tolerant of taking reasonable risks because they can more easily diversify away particular risks by holding shares in a variety of firms (Wiseman and Gomez-Mejia, 1998). The misalignment of interests between that of agents and principals is called the agency problem. This can potentially be solved by increasing the degree to which key agents within the firm view themselves as having the same interests as the principals; for example, by encouraging them to become owners of the firm‟s capital via an employee share ownership program. In principle, the greater the agent‟s shareholding, the greater the degree to which his/her increase in wealth results from the success of the company as a whole and, therefore, the more that his/her interests are aligned with those of the firm (Klein, 1987; Florkowski, 1987; Gamble et. al., 2002). This alignment of employee interests with those of their organization is seen to encourage long-term profit-maximising behaviour such as greater employee effort, workplace innovation and the reduction of wastage (Pendleton, 2006). Furthermore, Alchian and Demsetz‟s (1972) incentive contract theory suggests that alignment of interests through ESOP will also result in self and peer monitoring, leading to reduced monitoring costs. The increased effort combined with reduced monitoring costs, in turn, will contribute to higher performance.

3. ESOP in China

3.1 Development of ESOP in China

(8)

6

the difficulties of dismantling the collective properties of the people‟s commune. The peasants there found that some collective properties were simply physically indivisible, so they decided to issue shares to each worker on equal terms, instead of destroying the collective property to sell it in pieces.

However, it is wrong to divide up all collective properties into individual shares to the current work force, because when the older generation of workers left the enterprises, they converted their shares into cash and took them away, which lead to loss of companies‟ assets. So they decided to make some proportion of collective shares to be held by outside corporate bodies, such as local governmental agencies, or other firms in and out of the locality. This method aligned interests of outside shareholders and insider workers, and their economic success captured the attention of general public, and a series of programs were launched in the 1980s that aimed at reviving the failing SOEs by transferring property rights from the state to property users. Later in 1990s, the traditional emphasis on the role of central planning was abandoned, and China‟s economy was redeﬁned as a „socialist market economy‟ based on public ownership but not necessarily on public sole proprietorships. The Employees‟ ownership was initiated in the process of SOEs share holding restructuring. At that time, Beijing Tianqiao Department Store, Ltd., the first shareholding company in China, had set up internal employees stocks, which were bought by its employees. Subsequently, employee ownership was widely adopted in the stock based SOE reforms. By the end of 1996, more than 9200 SOEs had been converted into stockholding companies (Putterman, 1996). Some have estimated that about 86% of those stockholding companies had some kinds of stock ownership schemes (Cui, 1997), and the majority of these companies offer ESOP to workers.

(9)

7

(10)

8

2002). However, Chinese workers have lost their status after the reforms. They can no longer exert much influence on the decision-making processes of management. To many theorists in China, the ESOP offers a new avenue to greater industrial democracy.

According to the conventional political ideology of the People‟s Republic of China, workers are the social owners of state-owned enterprises. The introduction of stock ownership program to state enterprises has brought heated debate on the possibility of a redeﬁnition of ownership among state workers. One major consideration of the reform was to maintain a proletarian system of rule, with workers continuing to enjoy their ownership status in SOEs. To achieve this, workers were allowed to purchase the stock of their enterprises and, hence, achieve the role of employee-owner. Decades after the reform, ownership restructuring in the state sector has proceeded at a rapid pace.

3.2 The Characteristics of ESOPs in China

Since China differs from the West in many social, cultural, economical, and political aspects, the implementation of ESOP in China has to be considered in the context of its transition from a socialist to a more capitalistic form of economic structure. Hence, the ESOP in China, borrowed from the western countries, has its own characteristics.

(11)

9

created huge bad loans in banks. Employees‟ payment for the company stocks could effectively alleviate the problem, and transfer employees‟ savings into a source of enterprise funding.

Second, restricted rights. Employee ownership is defined in terms of three basic and fundamental rights: the right to possession of some share of the owned object‟s physical being and/or financial value (equity); the right to information about the status of that which is owned, and the right to exercise influence over the owned object (Chiu et. al., 2005). Workers in an ESOP in western countries have earning rights and voting rights, which allow them to obtain the dividend income based on their amount of shares, and to participate in the voting on major issues. However, in China, these rights are limited. This has some relation with the institutional arrangement in Chinese companies. Based on the new governance structure, all typical stockholding enterprises have a shareholder‟s committee, a board of directors, and a monitoring committee. They are formed in the interests of the shareholders of the enterprise. The members of the board of directors and the monitoring committee are appointed by the shareholders. The board of directors is the highest decision-making authority in the enterprise, while the monitoring committee acts as an independent authority to ensure that the enterprise is managed in the best interest of its shareholders (Chiu, 2003). Usually, firms with an ESOP have one member representing workers on the board and one on the monitoring committee. In many of Chinese companies, employees hold a very small proportion of the total shares outstanding. In the case of large companies like the sample in this research, the shares held by employees seldom exceed 10% of the total. Even in some regions, the percentage is restricted to 2.5%. Thus, employees are the minority shareholders and at most there will be only one board member representing their interests. Other stakeholders can easily over ride the proposal of the worker‟s representative on the board.

(12)

10

payable to shareholders in China typically range from 10 to 20 percent, a return considerably higher than the savings rate (i.e., around 6% at the time the data were collected). This is a rather big financial gain relative to their income level, but the return is fair because the investment in their enterprises involves much higher risk than putting their money in the bank. At this stage, the stock market in China is still imperfect. It is even not a semi-strong efficient market, the stock price is not highly correlated with company‟s performance. The pricing of shares is often done in a rather arbitrary way and in the absence of an independent and professional valuation firm. Employees do not have a reliable source to advise them whether the share price is reasonable. So they would expect a higher yield to compensate for this risk.

Fourth, in order to encourage U.S. companies to implement the ESOP program, the U.S. Congress has passed a series of laws, which provide tax concessions to the enterprise with ESOPs. For example, Employer contributions to the ESOP generally are tax-deductible up to a limit of 25% of covered payroll. Moreover, Companies that sponsor ESOPs can deduct dividends paid on ESOP-held stock (NECO, 2010). In China, tax incentives for companies rarely exist. Government supports are different between regions. Usually, employees in ESOP companies can get 10 percent discount for buying their companies stock from the state. And employee‟s dividends for reinvestment are exempt from personal income tax.

(13)

11

contended that, if Chinese workers are to be motivated by stock options, they should be allowed to hold an adequate amount of the company‟s stocks.

4. Literature Review

Previous research, both empirical and non-empirical have argued both sides of the issue and have produced mixed results. Conte and Tannenbaum (1978) compared the profitability of 30 small private ESOP and non-ESOP firms of comparable size in the same industry in the United States. They used the ratio of pretax profits to sales as the basis for gauging profitability. Each company‟s ratio was then divided by its industry‟s 1976 ratio. The weighted ratio was the measure of a company‟s pretax profitability. Their analysis shows a higher profit ratio of 1.7, which indicates greater profitability among ESOP companies than comparable sized companies in their respective industries.

Quarrey and Rosen (1987) collected data on sales and employment growth of 45 ESOP companies and 238 comparison companies. They then compared the growth rates of each ESOP company with five or more non-ESOP companies. If an ESOP company‟s economic growth was consistent and significantly higher than its comparison companies‟ growth, they would ascribed this to the „ESOP effect‟. Their results show that during the five years before instituting ESOP, the 45 companies had grown faster than the comparison companies: sales growth was 1.89% faster, and annual employment growth was 1.21% faster. So they concluded that ownership and participation together have considerable impact on firm performance.

(14)

12

performance.

Trebucq‟s (2004) study improved upon previous work by using employee ownership, performance and several control variables (size, leverage, growth), applied to a large sample size of 701 French companies. And the cross-sectional regressions show positive links between the presence of ESOPs and financial performance.

Besides, some other researchers have found a signiﬁcant negative linear relationship between employee ownership and ﬁrm economic performance. (Livingston and Henry,1980; Faleye, Mehrotra and Morck, 2006).

Livingston and Henry (1980) collected data of 102 firms divided equally between those with ESOPs and those without ESOPs. The firms represent 36 industries with sales varying from $176 million to $17.5 billion. Their univariable analysis of 9 profitability ratios indicates that non-ESOP firms in the sample are more profitable than ESOP firms. They proposed an possible explanation for this difference in profits to be that the cost of the plans has been larger than any net financial benefits to the firms (Livingston and Henry,1980).

(15)

13

5. Data and Methodology

I use a large new dataset on employee held stock in Chinese companies. ESOP and financial data was obtained from the annual reports and websites of listed companies, as well as official websites of Shanghai and Shenzhen Stock Exchanges that record the distribution of stock ownership, company announcements and news reports (tables 1 and 2). The employee ownership here in this paper is defined as ownership of common stock of a publicly traded corporation, held in a broad-based employee ownership plan (excluding top management ownership). A total of 289 Chinese companies were chosen from Top 500 Chinese companies of year 2008 for their enough published information. Since many companies‟ reports were not available for the latest year of 2009 when I started the research, I collected all companies‟ information for the year 2008. The methodology adopted for the study was similar to that used by Rajesh and Trebucq. The relationship existing between ESOPs and financial indicators was studied for the year 2008. Cross-sectional multiple regression analysis was used to analyze the dataset.

(16)

14

Table 1 Number of ESOP Firms in China Top 500

Sector N(Total) N(ESOP firms) % of ESOP firms

Energy 32 7 22%

Intermediate Goods 40 5 13%

Construction 18 6 33%

Capital goods 40 13 33%

Automobile 17 3 18%

Other Consumer Goods 38 9 24%

Food 8 4 50% Other Services 39 7 18% Property 13 3 23% Financial Services 15 7 47% Investment Companies 29 2 7% Total 289 66 23%

The capital owned by employees in ESOP companies is presented in Table 2. As shown in the table, the total percentage is as low as only 2.13%. This low percentage is considered to be acceptable, because the equities of these top companies are always over 1 billion RMB. Two percentage of ESOP adoption means the employees hold over 20 million RMB of company stock, which is already an enormous amount of capital. In order to prevent the losses of companies‟ and State‟s assets, the implementation of ESOP has to be restricted to this low percentage. Among all the sectors, companies in property and financial sectors have higher percentage of capital owned by employees, while energy and automobile companies have lower ratios.

Table 2 Percentage of Capital Owned by Employees (ESOPK) in Chinese Companies

Sector Mean Std. Dev. Minimum Maximum

Energy 0.34 0.45 0.01 1.26

Intermediate goods 1.71 2.61 0.04 6.25 Construction 2.31 2.38 0.03 6.79 Capital goods 2.11 3.27 0.02 9.66

Automobile 0.49 0.72 0.02 1.32

other consumer goods 3.90 5.32 0.13 16.73

(17)

15

5.1. Data Sources

5.1.1. Dependent variables

Performance variables: Three profitability measures will be used for the year 2008: return on equity (variable ROE), return on assets (variable ROA), and return on investments (variable ROI). ROE is the amount of net income returned as a percentage of shareholders equity. It measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROA is an indicator of how profitable a company is relative to its total assets. It gives an idea as to how efficient management is at using its assets to generate earnings. It is calculated by dividing a company's annual earnings by its total assets. ROI is a performance measure used to evaluate the efficiency of an investment. To calculate ROI, the benefit (return) of an investment is divided by the initial investment. With all three variables, the company‟s performance can be displayed thoroughly. Moreover, an ex-ante market performance measure will be used based on the following ratio: market capitalization over common equity, or market-to-book ratio (variable MKCE). Market-to-book ratio is a useful way of measuring company‟s performance and making quick comparisons with competitors. It is an essential figure to potential investors and analysts because it provides a simple way of judging whether a company is under or overvalued. If a company has a low market-to-book ratio, it‟s considered a good investment opportunity. This measure makes it possible to take into account market anticipations of future performance (Trébucq, 2004).

5.1.2. Independent variables Employee ownership:

(18)

16

stock ownership (variable ESOPK)”, is deﬁned as the percentage of company stock owned by non executive employees relative to the total number of company shares. This operationalization of employee ownership is the most widely used in corporate governance literature (Blasi et.al., 1996; Gamble, 2000; Park, Kruse and Sesil, 2004). This second variable indicates the degree of capital control that employee owners hold (Stéphane, 2004).

Control variables:

In order to recognize the fact that a number of factors may impact on company performance, other variables were also chosen as explanatory variables and are used in this study as control variables.

Leverage. In previous work leverage was found to be negatively associated with the

performance (Gerpott and Jakopin, 2005). It is argued that a higher leverage means higher agency costs because of the diverging interests between shareholders and debt holders which increase the total cost of the company (Jitendra et al., 2009). In this paper, leverage is measured by calculating the ratio of short- and long-term debt to total assets for each firm.

Capital intensity. As capital is locked up in inventories, holding large amounts of

inventory could have a negative impact on profitability. Hence, a negative relationship was expected between inventory and performance. It is measured by the ratio of total assets to sales.

Internationalization. Buhner (1987) argued that internationalization offers

(19)

17

The age of the firm. It is said that firms have a cycle of growth and decline. Newly

established firms generally have an enthusiastic and energetic crew, which should enhance performance. On the other hand young firms are confronted with start-up problems (Cromie, 1991). Older firms have overcome these problems, and can rely on experience and a network of existing suppliers and customers, which enhances efficiency. Birley and Westhead (1990) find mature firms performing better. Hence, a control variable, AGE, was introduced as the number of years since the inception of the firm to the observation date.

Firm size. A number of studies have incorporated firm size to explain differences in

(20)

18

Table 3. Definitions of variables Variables of Performance ROE Return on equity (year 2008)

ROA Return on Assents (year 2008) ROI Return on Investment (year 2008)

MKCE Market Capitalization /Common Equity (year 2008) Variables of Employee Ownership ESOPB Dummy variable (1=ESOP, 0=Non ESOP) (year 2008) ESOPK Percentage of Capital Owned by the Employees (year 2008)

Variables of contingency S01 Dummy variable (1=energy sector, 0=others)

S02 Dummy variable (1=intermediate goods sector, 0=others) S03 Dummy variable (1=construction sector, 0=others) S04 Dummy variable (1=capital goods sector, 0=others) S05 Dummy variable (1=automobile sector, 0=others)

S06 Dummy variable (1=other consumer goods sector, 0=others) S07 Dummy variable (1=food sector, 0=others)

S08 Dummy variable (1=investment companies, 0=others) S09 Dummy variable (1=other services sector, 0=others) S10 Dummy variable (1=property sector, 0=others)

S11 Dummy variable (1=financial services sector, 0=others) DEBT Total debt / Common Equity (year 2008)

LTDEBT Long-term Debt / Common Equity (year 2008) CI Total assets to sales (Capital Intensity) (year 2008) FORS International Sales / Total Sales (year 2008) AGE Number of years since the inception SIZE Logarithm of the sales (year 2008)

5.2. Methodology

(21)

19

Table 4. Main differences between ESOP- and non-ESOP Firms

Valid

N Minimum Maximum Mean

Stdandard Deviation Average for ESOP Average for non-ESOP t-test (t) t-test (p-value) ROE 289 -0.83 0.67 0.07 0.17 0.09 0.06 1.368 0.040** ROA 289 -0.45 0.69 0.04 0.09 0.06 0.03 1.932 0.006*** ROI 289 -0.95 1.29 0.05 0.16 0.09 0.04 2.156 0.074* MKCE 289 0.00 21.68 3.70 2.98 4.44 3.48 2.306 0.009*** DEBT 289 0.00 6.05 0.41 0.59 0.24 0.46 -2.718 0.005*** LTDEBT 289 0.00 2.88 0.27 0.46 0.24 0.27 -0.476 0.437 CI 289 0.00 33.63 2.50 4.24 2.64 2.47 0.278 0.497 FORS 289 0.00 1.00 0.13 0.18 0.18 0.12 2.784 0.000*** AGE 289 1.00 18.00 9.05 3.80 8.67 9.16 -0.920 0.354 SIZE 289 6.37 12.16 9.73 0.81 9.87 9.69 1.616 0.523 ***, **, *: Significant difference at 1%, 5% et 10%

Table 5. Correlation Matrix

***, **, *: Significant difference at 1%, 5% et 10%

ESOPB ESOPK ROE ROA ROI MKCE DEBT LTDEBT CI FORS AGE

(22)

20

The correlation matrix is shown in Table 5, which helps to illustrate the correlation among variables. Companies‟ short- and long-term leverage are usually significantly correlated (r = 0.379). AGE and SIZE are negatively related to firm‟s capital intensity, which indicates that, newly established small companies tend to spend great deal of capital to maintain operations. Firm size is also slightly positively correlated with long-term leverage (r =0.093). The two ESOP variables (ESOPB, ESOPK) are highly and significantly correlated with each other. In order not to disturb the result of ESOP‟s influence on firm performance, the two ESOP variables are separated into two models in the regression analysis.

The explanatory model of performance is established as follows:

Y1 = β 1（ESOPB）+β 2(DEBT)+ β 3(LTDEBT)+ β 4(CI)+ β 5(FORS)+ β

6(AGE)+ β 7(SIZE)+ β 8(SECTOR)+ξ

Y2 = β 1(ESOPK) +β 2(DEBT)+ β 3(LTDEBT)+ β 4(CI)+ β 5(FORS)+ β

6(AGE)+ β 7(SIZE)+ β 8(SECTOR)+ξ

Where the dependent variable (Y) represents all dependent variables (ROE, ROA, ROI, MKCE), the ESOP variables (ESOPB, ESOPK) investigate the importance of ESOP on firm performance, while control variables (DEBT, LTDEBT, CI, FORS, AGE, SIZE, SECTOR) are continuous.

6. Empirical results

6.1. Distinctive characteristics of ESOP companies

(23)

21

there was also a significant difference in the scores for ESOP companies ( M = 4.436, SD = 3.570) and non-ESOP companies ( M = 3.479, SD = 2.757) conditions, t = 2.306, p = 0.009.

Higher leverage reflects a more active fund flows in non-ESOP companies, and there is a significant difference between the mean leverages of ESOP companies (M = 24.48, SD = 27.06) and non-ESOP companies (M = 46.48, SD = 64.01), t = -2.718, p = 0.005. The long-term leverage of ESOP companies is a little bit lower than their counterparts, but the difference is not that significant (t = -0.467, p = 0.437).

The capital intensity of two groups do not statistically differ from each other, t = 0.278, p = 0.497. ESOP companies are also found to be more internationalized than non-ESOP companies. The mean of internationalization of ESOP companies (M = 18.33, SD = 22.49) scored significantly higher than non-ESOP companies (M = 11.51, SD = 15.70), t = 2.784, p = 0.000.

(24)

22

6.2. Performance Determinants

Table 6. Regression using ROE as the dependent variable

Linear Regression Linear Regression Variables Sign Standard

Coefficients t statistic

P

value Variables Sign

Standard Coefficients t statistic P value (constant) -2.374 .018 (constant) -2.595 .010 ESOPB .042 .735 .463 ESOPK + .138 2.485 .014 DEBT - -.178 -2.961 .003 DEBT - -.173 -2.939 .004 LTDEBT - -.287 -4.531 .000 LTDEBT - -.287 -4.589 .000 CI -.014 -.219 .827 CI .004 .058 .954 FORS -.057 -1.018 .310 FORS -.052 -.955 .341 AGE -.036 -.659 .510 AGE -.036 -.662 .508 SIZE + .204 3.533 .000 SIZE + .213 3.734 .000 S1 + .161 2.733 .007 S1 + .170 2.922 .004 S5 .011 .193 .847 S5 .017 .315 .753 S7 -.089 -1.610 .109 S7 + -.098 -1.796 .074 S8 .029 .518 .605 S8 .035 .639 .524 S10 + .105 1.895 .059 S10 + .098 1.802 .073 S11 .041 .624 .533 S11 .014 .212 .832 R2=0.206; Adjusted R2=0.168 Sample size(N)=288 F=5.485 p-value=0.000 R2=0.222; Adjusted R2=0.185 Sample size(N)=288 F=6.029 p-value=0.000

(25)

23

slightly positive related with firms‟ ROE, while their relationships with other performance variables (ROA, ROI and MKCE) are not significant.

Table 7. Regression using ROA as the dependent variable

P

Standard Coefficients t statistic P value (constant) -.644 .520 (constant) -.746 .456 ESOPB .083 1.389 .166 ESOPK .079 1.354 .177 DEBT - -.123 -1.964 .051 DEBT - -.130 -2.094 .037 LTDEBT - -.152 -2.291 .023 LTDEBT - -.149 -2.244 .026 CI - -.158 -2.382 .018 CI - -.152 -2.274 .024 FORS -.072 -1.233 .218 FORS -.059 -1.020 .309 AGE - -.114 -1.994 .047 AGE - -.117 -2.044 .042 SIZE - .117 1.935 .054 SIZE - .125 2.069 .039 S1 .060 .980 .328 S1 .066 1.065 .288 S5 -.008 -.139 .890 S5 -.006 -.102 .919 S7 -.073 -1.267 .206 S7 -.074 -1.275 .203 S8 .009 .149 .882 S8 .005 .084 .933 S10 .061 1.058 .291 S10 .059 1.021 .308 S11 .098 1.426 .155 S11 .091 1.302 .194 R2=0.128; Adjusted R2=0.087 Sample size(N)=288 F=3.118 p-value=0.000 R2=0.128; Adjusted R2=0.087 Sample size(N)=288 F=3.109 p-value=0.000

(26)

24

the 1 percent level.

Table 8. Regression using ROI as the dependent variable

P

Standard Coefficients t statistic P value (constant) -1.520 .130 (constant) -1.507 .133 ESOPB .093 1.512 .132 ESOPK .007 .112 .911 DEBT - -.128 -1.982 .048 DEBT - -.143 -2.222 .027 LTDEBT -.063 -.924 .356 LTDEBT -.058 -.844 .400 CI .046 .679 .498 CI .041 .595 .553 FORS -.021 -.343 .732 FORS -.004 -.066 .947 AGE -.015 -.257 .798 AGE -.020 -.331 .741 SIZE + .130 2.089 .038 SIZE + .135 2.154 .032 S1 .098 1.551 .122 S1 .098 1.542 .124 S5 -.015 -.248 .804 S5 -.017 -.284 .777 S7 -.038 -.645 .520 S7 -.031 -.523 .601 S8 .004 .063 .950 S8 -.007 -.122 .903 S10 .078 1.319 .188 S10 .080 1.344 .180 S11 .044 .626 .532 S11 .056 .774 .440 R2=0.077; Adjusted R2=0.034 Sample size(N)=288 F=1.769 p-value=0.048 R2=0.070; Adjusted R2=0.026 Sample size(N)=288 F=1.581 p-value=0.090

(27)

25

Table 9. Regression using MKCE as the dependent variable

P

Standard Coefficients t statistic P value (constant) 3.702 .000 (constant) 3.443 .001 ESOPB + .124 2.015 .045 ESOPK + .236 3.965 .000 DEBT .046 .704 .482 DEBT .045 .715 .475 LTDEBT -.062 -.906 .366 LTDEBT -.060 -.890 .374 CI .075 1.095 .274 CI .101 1.501 .135 FORS .056 .934 .351 FORS .075 1.280 .202 AGE - -.101 -1.710 .088 AGE - -.103 -1.785 .075 SIZE - -.128 -2.049 .041 SIZE - -.109 -1.785 .075 S1 .014 .220 .826 S1 .031 .489 .625 S5 -.029 -.483 .629 S5 -.019 -.325 .745 S7 .094 1.574 .117 S7 .082 1.406 .161 S8 -.013 -.220 .826 S8 -.009 -.158 .875 S10 -.055 -.928 .354 S10 -.064 -1.100 .272 S11 .002 .030 .976 S11 -.037 -.519 .604 R2=0.071; Adjusted R2=0.027 Sample size(N)=288 F=1.614 p-value=0.081 R2=0.108; Adjusted R2=0.066 Sample size(N)=288 F=2.566 p-value=0.002

In the regression using market performance (MKCE) as the dependent variable, both two ESOP variables are observed to have significantly positive relationship with MKCE. This result is similar with Peter‟s (2008) report of Federal Reserve Bank of New York that, ESOP has a positive effect on firm‟s market-to-book ratio. The result may suggest that, company with an ESOP is likely to have more growth opportunity. The control variable „AGE‟ is proved to be slightly negatively related to MKCE at 10% significance. Firm size has negative effect on firm‟s market performance (p<0.1). It is probably because large companies, especially these top companies in the sample, normally prefer to level off rather than expand. But small companies usually aim at rapidly growth, and it is easier for them to make a progress than large companies.

(28)

26

investment projects to transfer wealth from debt holders to equity holders. Hence the use of ESOPs may also negatively relate to a firm‟s leverage. ESOPs are supposed to reduce conflicts and agency costs.

7. Conclusion:

The reform of ownership has been introduced in China for more than ten years. Of all the initiatives packaged in the ownership reform, the ESOP is considered the key to the success of the reform. It was implemented to (a) bail out failing ﬁrms, (b) raise funds, (c) increase work motivation, (d) decrease agency costs and (e) promote industrial democracy. But little systematic effort has been made to evaluate its effectiveness on companies‟ financial performance.

(29)

27

Table 10. Regression Synthesis Independent

variables

Dependent variables: performance

ROE ROA ROI MKCE

ESOPB +(**) ESOPK +(**) +(***) DEBT -(***) -(**) -(**) LTDEBT -(***) -(**) CI -(**) FORS AGE -(**) -(*) SIZE +(***) +(*) +(**) -(*) S1 +(***) S5 S7 S8 S10 +(*) S11

See Table 6 See Table 7 See Table 8 See Table 9 + ou -: Symbol of the relationship,

(***), (**) ou (*): Significant relation at 1%, 5% and 10%.

The success of ESOPs can be termed as the result of financial stimulation and participative and managerial dynamics. In a wider perspective, ESOPs as a symbol of cohesion and stability could emerge as a determinant of social capital creation, so that the economic contribution of ESOPs could be achieved through organizational capital creation.

This research has some limitations. It only concerns the data of year 2008, it can not give a conclusion that ESOP has a sustainable effect on company‟s performance. For future research, based on Chinese market conditions, it is also interesting to find what kind of company is suitable to adopt ESOP to improve its future performance.

8. References:

Aghion, P. and Tirole, J., 1997, Formal and real authority, Journal of Political Economy, 105(1), pp. 1–29.

(30)

28

Organization, American Economic Review, 62(5):777–95.

Amato, L. and Wilder, R., 1985, The Effects of Firm Size on Profit Rates in US

Manufacturing, Southern Economic Journal, 52(1), pp. 181–190.

Birley, S. and P. Westhead, 1990, Growth and performance contrasts between ‘types’

of small firms, Strategic Management Journal 11, 535–557.

Blecher, M. J., 2002, Hegemony and workers‟ politics in China, The China Quarterly, pp.283–303

Buhner, R., 1987, Assessing international diversification of West German

corporations, Strategic Management Journal 8(1): 25-37.

Chiu, C. K. W., 2003, Employee Stock Ownership Plans and Organisational

Integration among Workers in the People’s Republic of China, Human Resource

Management Review, 13: 407–22.

Chiu, C. K. W., Huang, X. and Lu, H. L., 2005, When Marx Borrows from Smith: the

ESOP in China, Journal of Contemporary China, 14(45), November, 761-772

Chiu, C. K. W., Hui, H and Lai, W. F. G., 2007, Psychological Ownership and

Organizational Optimism Amid China’s Corporate Transformation: Effects of an Employee Ownership Scheme and a Management-dominated Board, Journal of

Human Resource Management 18:2 February 303–320

Conte, M. and Tannenbaum, A. S., 1978, Employee-Owned Companies: Is the

Difference Measurable?, Monthly Labour Review, 101:23–8.

Cromie, S., 1991, The problems experienced by young firms, International Small Business Journal 3, 43–61.

Cui,Y., 1997, Joint-stock system: The focus of the Chinese people, Beijing: Chinese

Economic Press.

ESOP Tables: A Survey of Companies with Employee Stock Ownership Plans’, Journal of Corporation Law, Spring 81, Vol 6

Faleye, O., Mehrotra, V. and Morck, R., 2006, When labor has a voice in corporate

governance, Journal of Financial and Quantitative Analysis, 41:489–510.

(31)

29

Financial performance of Moblile Network Operations, Telecommunications

Policy 29(2005): 635-661

Jensen, M. C. and Meckling, W. H., 1976, Theory of the Firm: Managerial Behavior,

Board Costs and Ownership Structure, Journal of Financial Economics, 3:

305–60.

Jitendra, M. and Arun, K. M., 2009, Effect of Leverage and Adjustment Costs on Corporate Performance: Evidence from Indian Companies, Journal of Management Research, Vol. 9, No. 1, April 2009, pp. 35-42

Lee, J., 2009, Does Size Matter in Firm Performance? Evidence from US Public Firms, Int. J. of the Economics of Business, Vol. 16, No. 2, July 2009, pp. 189-203

Lixin Colin, Tian Zhu and Yimin Lin, 2005, Politician Control, Agency Problems and

Ownership Reform, Economics of Transition, Volume 13 (1), 1-24

Livingston, D. and Henry, J., 1980, The effects of employee stock ownership on corporate proﬁts, Journal of Risk and Insurance, 47: 491–505.

Park, Sangsoo, and Moon Song, 1995, Employee Stock Ownership Plans, Firm

Performance, and Monitoring by Outside Blockholders, Financial Management

24, pp. 52-65

Park, R., Kruse, D. and Sesil, J., 2004, Does employee ownership enhance ﬁrm

survival? In: Perotin, V. and Robinson, A.(eds.) Advances in the Economic

Analysis of Participatory and Self-managed Firms (Vol.8), 3-33. JAI Press,Greenwich, CN.

Quarrey, M. and Rosen, C., 1987, How well is employee ownership working?, Harvard Business Review, 65:126–30.

Rosen, C., 1982, Selling a Small Business to Its Employees Through an ESOP, Journal of Small Bussiness Management, April, 57-62

Tang, W. F., Parish, W. L. and Feng, T., 1996, China Labour Relations in Changing

Work Environment, Journal of Contemporary China, 5: 367–89.

(32)

30

France, Corporate Ownership & Control, Volume 1, Issue 4

Wiseman, R., and Gomez–Mejia, L. R., 1998, A Behavioral Agency Model of Risk

Taking, Academy of Management Review, 23, 1, 133–153.