Employee stock ownership and the cost of capital |
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| Institution: | 1. Aix-Marseille University, INSEEC & IFGE, IMPGT, 21 Rue Gaston de Saporta, 13100, Aix-en-Provence, France;2. Aix-Marseille University, France;3. KEDGE BS & CRCGM, KEDGE BS 680 cours de la Libération, 33405, Talence Cedex, France;1. La Rochelle Business School, La Rochelle 17000, France;2. American University in Cairo, New Cairo 11835, Egypt;1. Kent Business School, University of Kent, United Kingdom;2. Nottingham Business School, Nottingham Trent University, United Kingdom;3. School of Social and Behavioural Sciences, Kingston University, United Kingdom;1. Birmingham Business School, University of Birmingham, Edgbaston, Birmingham, B15 2TY, United Kingdom;2. School of Management and Economics, Cyprus University of Technology, Limassol, 3036, Cyprus |
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| Abstract: | This paper investigates the relationship between employee stock ownership and the cost of capital, the main determinant of shareholder value creation computed through economic value added (EVA). By reducing agency conflicts within the firm, we hypothesize that employee share ownership reduces the firm’s cost of capital by affecting its two components, i.e. the cost of equity and the cost of debt. We test this hypothesis in France, a leading country in terms of employee ownership, based on a panel of the 120 largest listed companies for the 2000–2011 period. We find: (i) no significant relationship between employee stock ownership and the cost of equity; (ii) a negative curvilinear relationship between employee stock ownership and the cost of debt; (ii) a negative curvilinear relationship between employee stock ownership and the weighted average cost of capital. These results suggest debtholders regard ESO as positive as long it is moderate because it shifts risk from them to employees and that this effect is still perceptible in the weighted average cost of capital. |
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| Keywords: | Shared capitalism employee ownership Corporate governance Cost of equity Cost of debt Cost of capital Agency conflicts |
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