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Do Non-Executive Employees Have Information? Evidence from Employee Stock Purchase Plans

AFA 2011 Denver Meetings Paper

Forthcoming in Management Science

50 Pages Posted: 19 Mar 2010 Last revised: 23 Apr 2015

Ilona Babenko

Arizona State University

Rik Sen

University of New South Wales

Date Written: April 17, 2014

Abstract

Using novel data on employee stock purchase plans (ESPPs), we show that aggregate purchases of company stock by lower-level employees predict future stock returns. Firms in the top quartile of ESPP purchases outperform those in the bottom quartile by 10% in the year after purchase. The relation between ESPP purchases and future stock returns is stronger for firms with high information asymmetry. Further, we find that high ESPP purchases are associated with a lower likelihood of earnings restatements and breaks in strings of consecutive earnings increases, as well as higher future sales growth and more innovation. We argue that these findings support the hypothesis that lower-level employees have information about future firm performance, and we examine and reject a number of alternative explanations. Our results have implications for firms using employees as a source of capital, accounting issues related to expensing of equity-based compensation, and disclosure policy.

Keywords: employee stock purchase plans, insider trading, return predictability

JEL Classification: G14, G30, G32, M52

Suggested Citation

Babenko, Ilona and Sen, Rik, Do Non-Executive Employees Have Information? Evidence from Employee Stock Purchase Plans (April 17, 2014). Forthcoming in Management Science. Available at SSRN: https://ssrn.com/abstract=1572741 or http://dx.doi.org/10.2139/ssrn.1572741

Ilona Babenko

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Rik Sen (Contact Author)

University of New South Wales ( email )

Gate 2, High Street, UNSW
Room 344A, UNSW Business School Bldg.
Sydney, NSW 2052
Australia
+61293857886 (Phone)

HOME PAGE: http://www.rik-sen.com

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