No Fable this: A Theory of Esops
Posted: 31 Oct 2000
Recent advances in takeover technology have diminished the value of implicit contracts between management and employees which secure the employees' specific investments. Absent such security rational employees will reduce the amount of specific investments they make. Firms which value investments in firm-specific human capital have the inventive to develop mechanisms to restore employees' confidence that they will be allowed to earn a return on their firm-specific human capital. We contend that ESOPs are one such mechanism. Consistent with this theory, we find that proxies for firm specific investments are positively related to the probability a firm has a large ESOP.
JEL Classification: G32
Suggested Citation: Suggested Citation