Corporate Diversification And Employee Stock Ownership Plan

In June 2014,China’s Securities Regulatory Commission issued the “Guidance on the Implementation of Employee Stock Ownership Plan Pilot in Listed Companies” to promote the pilot employee stock ownership plan in listed companies.Employee stock ownership plan refers to a company’s employees becoming shareholders of the company by purchasing some or all of the company’s shares,and thus gaining corresponding management and voting rights.The employee stock ownership plan is also a means of equity incentive.By allowing employees to hold shares in the company,enterprises can help motivate employees to work hard,enhance their sense of belonging,bind their own interests with the long-term interests of the enterprise,attract and retain talents.Moreover,the exercise of employee stock options can bring a large inflow of capital to the enterprise,which can replace external financing to a certain extent and reduce the financing constraint of the enterprise.In addition,employees strengthen the supervision and control of management,which in turn reduces the agency cost between shareholders and management within the enterprise.As market competition becomes more and more intense,enterprises gradually start to operate multiple products or businesses across industries to expand their business scope to ensure their survival and long-term development,and diversification becomes an important development strategy of enterprises.Although many companies have failed to diversify,some companies still tend to choose diversification to expand their business in order to enhance their market competitiveness.Existing studies have focused on the positive relationship between diversification and corporate risk,financing constraints,and agency costs,while alleviating financing constraints and reducing agency costs are precisely the key motives for implementing employee stock ownership plan,so it is worth exploring the relationship between diversification and employee stock ownership plan.How do the characteristics of diversified companies and the external institutional environment affect the choice of employee stock ownership plan?In this paper,we study the relationship between diversification and employee stock ownership plan based on agency theory,financing constraint theory,human capital theory,“golden handcuffs” theory and signaling theory,using a sample of A-share listed companies in Shanghai and Shenzhen from 2010 to 2020,and draw the following conclusions: In general,the higher the degree of corporate diversification is,the more enterprises tend to implement employee stock ownership plan,and the above findings still hold after a series of robustness tests such as fixed effects model,replacement variables,entropy balance matching,and instrumental variables regression.The mechanism test indicates that firms with high degree of diversification tend to choose employee stock ownership plan for the motives of alleviating financing constraints and reducing agency costs,while the cross-sectional test suggests that the relationship between diversification and employee stock ownership plan will be more significant in the sample of non-state owned enterprises,firms with high volatility of performance,high quality talents and high marketization level.From the economic consequence test,the choice of employee stock ownership plan by highly diversified firms will promote the innovation performance as well as total factor productivity of the firm,which is conducive to the high quality development of the firm.From a theoretical perspective,the research in this paper somewhat expands the literature on the economic consequences of diversification and the influencing factors of employee stock ownership plan.From a practical perspective,by observing the moderating effects of different contexts on the relationship between corporate diversification and employee stock ownership plan,it helps companies to pay attention to the choice of employee stock ownership plan according to their own characteristics and the characteristics of the external institutional environment.At the same time,the research in this paper can provide some guidance for listed companies implementing employee stock ownership plan pilots,as well as some support for relevant regulatory authorities in formulating policies regarding employee stock ownership plan,and provide useful suggestions for economic reforms in the new era.