Employee stock ownership plans and controlling shareholders’ over-appointing of directors

Abstract

Using a large sample of Chinese non-financial listed firms from 2014 to 2021, we find that employee stock ownership plans (ESOPs) significantly reduce controlling shareholders’ over-appointing of directors, and this finding is robust after addressing endogeneity concerns. We then provide evidence to show that reducing the risk of control transfer and controlling shareholders’ private benefits of control are important channels in which ESOPs affect controlling shareholders’ over-appointing of directors. Furthermore, we find that effect of ESOPs on controlling shareholders’ over-appointing of directors is less pronounced when firms with stronger corporate governance. We also demonstrate that the type of ownership, the source of funding, and the lock-up period of ESOPs can affect the effectiveness of ESOPs.