Performance following ESOP formations by publicly-held corporations

The study assesses the stock performance of publicly-traded firms following ESOP formations. The results show that ESOPs contributing common stock elicit a more favorable market response than ESOPs contributing convertible preferred stock. This result is consistent with the argument that the convertible preferred contribution reduces the regularity of the repurchase of common shares in the market. Also, ESOPs intended to defend against takeovers elicited no market reaction while other ESOPs elicited a favorable market response. This result supports the hypothesis that ESOPs intended to prevent takeovers may eliminate external market discipline. The study also assesses the long-term performance of firms following ESOP formations to determine whether some hypothesized effects of ESOPs are realized. Results of the analysis suggest that firms experienced favorable long-term valuation effects following the creation of new ESOPs. However, the expansion of existing ESOPs was not as favorable. Differences in the effect can be attributed to the loss of external discipline when an expanded ESOP leads to an increase in proportional ownership. *** DIRECT SUPPORT *** A00HA012 00006