Transcript Slide 1

Employee Ownership and Firm Disclosure
Rutgers Fellowship Meeting
February 25th, 2011
Francesco Bova
Yiwei Dou
Ole-Kristian Hope
Rotman School of Management
University of Toronto
Employee Ownership and Firm Disclosure
• Much debate over the role of employee ownership (for rank-and-file
employees) in the economy
• Contrasting viewpoints over the last decade
• Proponents:
• “Shared Capitalism”: employee ownership improves morale, lowers
turnover, improves productivity.
• Makes both the firm and employees better off: win-win
• Opponents:
• Catastrophic failures of employee majority-owned firms
• Post-Enron, concerns over correlated risk
Our study adds to the debate by assessing employee ownership’s effect on a
firm’s propensity to be transparent and produce higher quality disclosure
2
Voluntary disclosure
• Theory (e.g., Verrecchia 2001; Dye 1985; Jovanovic 1982) suggests
that firms should be fully transparent if there are no costs to being
transparent
• Empirically however we continue to observe variation in disclosure
quality (Beyer et al. 2009), implying a tension between the costs and
benefits to disclosure
• A potential explanation is that there are proprietary costs to disclosure
which are driven by rent-extracting firm stakeholders (e.g.,
competitors, suppliers)
• We focus on the firm’s employees as a group of stakeholders that have
the potential to extract above-market rents from the firm and on
employee ownership as a tool to mitigate this ability
Prior Literature
Information asymmetry when employees can extract abovemarket rents:
• Scott (1994) – Canadian firms which were highly unionized or which
have employees with higher than average salaries were less likely to
disclose pension data
• Hilary (2006) – unionized firms exhibit higher information
asymmetries than non-unionized firms
• Bova (2010) – unionized firms more likely to miss estimates and less
likely to guide expectations down to meet or beat estimates
• Bens, Berger, and Monahan (2011) – Firms in industries with high
labor costs are less likely to disaggregate segment information
Cramton, Mehran, and Tracy (2008) find that employee
ownership in an environment where employees can extract
above market rents leads to a:
• weaker bargaining position for employees
• the firms becoming more amenable to demands
• fewer disputes involving strikes
Research Questions
Impact of employee ownership on voluntary disclosure? Employee
ownership aligns objectives and decreases negotiation leverage; decreasing
negative consequences (but no effect on costs to opaqueness)
H1: Positive relation between employee ownership and voluntary
disclosure
Impact of employee bargaining power on disclosure? We predict that firms
have incentive to disclose less
H2: Negative relation between union density and voluntary disclosure
Interaction? If incentive to disclose less the greater the employee negotiation
power, and if ownership mitigates power, then predict ownership to be more
important the greater the negotiation leverage:
H3: The positive relation between employee ownership and disclosure is
larger with higher union density
Research Design: Test Variables
ESOP
• Employee stock ownership plan (ESOP) is our proxy for employee
ownership
• Source: Form 5500 (King of Pension Funds database); 1999-2007
• ESOP = 1 if firm i has an employee stock ownership plan in year t and
zero otherwise (i.e., in the control sample). [Also changes tests and
continuous variable.]
• We don’t use evidence of other types of employee ownership plans for
several reasons
UNIONR
• Proxy for employee negotiation leverage
• Union density by 3-digit SIC industry code before 2002 and 6-digit
NAICS industry code after 2002
• Obtained from the Union Membership and Coverage Database
• Updated every year in our tests
Table 3 Panel B: Guidance and CC
ESOP
UNIONR
ESOP×UNIONR
SIZE
LIT
LEV
GROWTH
ROA
SEO
MA
EARNVOL
AGE
SI
NBSEG
NGSEG
DLW
ANALYFOL
HERFIN
IROA
Year FE
Observations
Adj. or Pseudo R-squared
(1)
MF
-0.092
(0.94)
-0.016***
(3.66)
0.016***
(3.14)
0.073***
(3.05)
0.182*
(1.88)
-0.216**
(2.10)
-0.071*
(1.65)
1.174***
(4.69)
0.427***
(2.91)
0.343***
(7.35)
-0.059
(1.12)
-0.000
(0.09)
-2.310***
(3.35)
0.081***
(3.35)
-0.023
(0.99)
-0.459
(1.39)
0.035***
(5.57)
0.812***
(3.44)
0.240
(0.55)
YES
5,041
0.174
(2)
LOGNMF
-0.011
(0.17)
-0.010***
(3.88)
0.008***
(2.65)
0.062***
(4.48)
0.162**
(2.44)
-0.102*
(1.78)
-0.023
(1.41)
0.720***
(5.97)
0.173**
(2.27)
0.231***
(7.43)
-0.003
(0.10)
0.002
(1.17)
-1.224***
(3.37)
0.052***
(3.50)
-0.030**
(2.06)
-0.255
(1.28)
0.022***
(5.89)
0.456***
(3.02)
0.257
(0.90)
YES
5,041
0.265
(3)
LOGNGMF
0.009
(0.19)
-0.007***
(3.69)
0.005*
(1.95)
0.043***
(4.43)
0.097*
(1.94)
-0.070
(1.64)
-0.002
(0.12)
0.569***
(6.16)
0.148**
(2.51)
0.158***
(6.18)
-0.008
(0.41)
0.002**
(2.03)
-0.514*
(1.79)
0.038***
(3.44)
-0.024**
(2.32)
-0.202*
(1.82)
0.014***
(4.99)
0.294***
(2.59)
0.169
(0.73)
YES
5,041
0.224
(4)
LOGNBMF
-0.015
(0.33)
-0.007***
(3.44)
0.006***
(2.72)
0.039***
(4.07)
0.142***
(2.99)
-0.058
(1.47)
-0.028**
(2.55)
0.441***
(5.18)
0.100*
(1.66)
0.160***
(6.82)
-0.009
(0.50)
0.001
(1.20)
-1.013***
(3.61)
0.034***
(3.22)
-0.021**
(2.05)
-0.099
(0.56)
0.016***
(6.23)
0.337***
(3.17)
0.037
(0.18)
YES
5,041
0.211
(5)
LOGMFS
-0.023
(0.27)
-0.014***
(3.85)
0.012***
(2.75)
0.082***
(4.39)
0.209**
(2.38)
-0.135*
(1.73)
-0.027
(1.19)
0.999***
(6.11)
0.231**
(2.28)
0.315***
(7.60)
-0.012
(0.33)
0.002
(0.87)
-1.625***
(3.32)
0.072***
(3.63)
-0.037*
(1.89)
-0.351
(1.32)
0.030***
(5.93)
0.637***
(3.21)
0.326
(0.87)
YES
5,041
0.266
(6)
CC
0.011
(0.09)
-0.020***
(4.04)
0.015**
(2.46)
0.022
(0.75)
0.100
(0.83)
-0.130
(1.17)
-0.000
(0.01)
0.610***
(2.60)
0.236
(1.47)
0.359***
(5.92)
-0.076
(1.27)
-0.007**
(2.47)
-0.079
(0.10)
0.110***
(4.28)
0.072***
(2.73)
-0.826*
(1.83)
0.078***
(10.27)
-0.350
(1.30)
0.437
(0.91)
YES
5,041
0.362
(7)
LOGNCONFC
-0.018
(0.37)
-0.010***
(4.67)
0.008***
(3.05)
0.024*
(1.80)
0.045
(0.89)
-0.046
(0.93)
-0.007
(0.45)
0.275**
(2.54)
0.164***
(2.90)
0.171***
(6.67)
-0.041
(1.61)
-0.003***
(2.69)
-0.060
(0.17)
0.048***
(4.64)
0.027***
(2.75)
-0.318*
(1.81)
0.034***
(13.02)
-0.120
(0.97)
-0.162
(0.83)
YES
5,041
0.493
Table 4: Readability
ESOP
UNIONR
(1)
FOGINV
0.230***
(2.98)
-0.008**
(2.08)
(2)
LENGTHINV
0.142***
(4.50)
-0.009***
(5.92)
-0.079***
(3.33)
-0.012
(0.26)
0.000
(0.03)
2.163***
(2.58)
-0.047
(0.67)
-0.045*
(1.76)
0.111***
(5.14)
-0.212
(1.12)
-0.003
(0.04)
-0.852**
(2.18)
0.356
(1.41)
0.227
(0.51)
YES
4,197
0.061
-0.125***
(12.85)
-0.038*
(1.67)
0.003**
(2.35)
1.831***
(5.87)
-0.012
(0.33)
-0.021**
(2.26)
0.004
(0.50)
-0.182***
(2.93)
-0.060**
(2.37)
-0.127
(0.79)
0.444***
(4.87)
0.686***
(3.98)
YES
4,197
0.260
ESOP×UNIONR
SIZE
GROWTH
AGE
SI
EARNVOL
NBSEG
NGSEG
SEO
MA
DLW
HERFIN
IROA
Year FE
Observations
Adj. R-squared
(3)
FOGINV
0.204*
(1.80)
-0.009*
(1.69)
0.002
(0.29)
-0.078***
(3.32)
-0.013
(0.27)
0.000
(0.03)
2.171***
(2.60)
-0.047
(0.66)
-0.045*
(1.76)
0.111***
(5.14)
-0.214
(1.13)
-0.004
(0.06)
-0.852**
(2.17)
0.359
(1.42)
0.232
(0.52)
YES
4,197
0.060
(4)
LENGTHINV
0.091**
(2.06)
-0.011***
(4.94)
0.004
(1.35)
-0.125***
(12.89)
-0.040*
(1.76)
0.003**
(2.35)
1.847***
(5.93)
-0.010
(0.29)
-0.021**
(2.24)
0.004
(0.47)
-0.186***
(2.95)
-0.062**
(2.43)
-0.126
(0.78)
0.450***
(4.90)
0.697***
(4.05)
YES
4,197
0.261
Results: Table 5 (DSCORE)
• DSCORE: aggregate measure of disclosure
• We include all controls from tables 3 and 4
ESOP
UNIONR
(1)
DSCORE
0.041***
(3.05)
-0.002***
(3.23)
ESOP×UNIONR
ALL CONTROLS
Year FE
Observations
Adj. R-squared
YES
YES
4,197
0.312
(2)
DSCORE
0.001
(0.05)
-0.004***
(4.58)
0.003***
(2.94)
YES
YES
4,197
0.316
Robustness Checks
• Several robustness tests
• Changes tests
– Look at DSCORE for firms that adopt plans pre and
post adoption
• A continuous proxy for employee ownership
– Look at assets held per participant
• Other reasons to adopt an ESOP
– Cash constraints, anti-takeover defence
• Effect of Reg FD
• Heckman and other matching procedures
• All results consistent with ESOPs improving disclosure
and that the effect is particularly strong in highly unionized
settings.
Conclusions
• Both the level and quality of disclosure increasing (decreasing) in
employee ownership (employee bargaining power)
• The general tenor of the results suggests that the role of employee
ownership in improving disclosure is particularly large when
employees have negotiation power (interaction effect)
Results suggest:
• Employee ownership as a novel determinant to various facets of
disclosure
• A novel capital market benefit to firms adopting an employee
ownership plan (improved disclosure)
Possible extensions:
• Bova (2011) an increased propensity to MBE for ESOP firms
• Employee ownership and the cost of capital?
• Employee ownership and real effects?