Employee Ownership and Firm Disclosure Rutgers Fellowship Meeting February 25 th , 2011

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

2. 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

3. 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

4. Prior Literature • Information asymmetry when employees can extract above-market 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

5. 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

6. 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

9. Results: Table 5 (DSCORE) • DSCORE: aggregate measure of disclosure • We include all controls from tables 3 and 4

10. 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.

11. 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?