ESOPs and stock market valuation

Abstract

This study contributes to the field of corporate finance by exploring the relationship between employee stock options (ESOPs) and value creation for shareholders. The theme is of interest because previous research has shown varying results and because ESOPs are an important tool in agency theory, with implications for management theories. The relationship was explored through the creation of logarithmic-linear regression models that modeled the correlation between a dummy variable for ESOP use and stock market capitalization as well as stock price volatility. A dataset consisting of 279 non-financial, non-utility, public Swedish firms was collected spanning the years 2001-2021. The results from the regression models showed a statistically significant positive correlation between adopting ESOPs and stock market capitalization but no significant correlation between ESOP use and stock price volatility. The most advanced model employing control variables, firm- and time-specific fixed effects found that firms employing ESOPs enjoyed a 13-14% higher stock market capitalization. The results of our study implies that ESOPs are an effective tool in aligning employee-shareholder interests and that the value created by this is indeed captured by the stock market. It also implies that ESOPs avoid the pitfalls of self determination theory, possibly because ESOPs enable internalization of the firm's goals.