Employee Stock Ownership Plans and Corporate Innovation

Abstract

Based on the sample of A-share listed companies that implemented ESOPs from 2014 to 2021, this paper empirically studies the impact of ESOPs on corporate innovation output. The results show that ESOPs can promote corporate innovation output. The research in this paper reveals the important role of employees in corporate innovation, which enriches and expands the research on the influencing factors of corporate innovation with employees as the main body. The research conclusions have some implications for the implementation of ESOPs in listed companies.

Full text

Academic Journal of Management and Social Sciences
ISSN: 2958-4396 | Vol. 2, No. 1, 2023
54
Employee Stock Ownership Plans and Corporate
Innovation
Yixuan Zhang
School of Management, Shanghai University, Shanghai 200444, China
Abstract: Based on the sample of A-share listed companies that implemented ESOPs from 2014 to 2021, this paper empirically
studies the impact of ESOPs on corporate innovation output. The results show that ESOPs can promote corporate innovation
output. The research in this paper reveals the important role of employees in corporate innovation, which enriches and expands
the research on the influencing factors of corporate innovation with employees as the main body. The research conclusions have
some implications for the implementation of ESOPs in listed companies.
Keywords: Employee stock ownership plan; Corporate innovation.
1. Introduction
The report to the 19th National Congress of the Communist
Party of China clearly pointed out that we should build our
country into an innovative country, and strive to train a large
number of international strategic talents, scientific and
technological talents, young scientific and technological
talents and efficient innovation teams. Corporate innovation
is very important for the survival and development of
enterprises, which can increase the competitiveness of
enterprises, promote the improvement of various industrial
structures, and play a great role in promoting the
transformation of economic development mode. According to
the report to the 19th National Congress of the Communist
Party of China, China's economy is in a period of
transforming its development mode, optimizing its economic
structure and transforming its growth drivers. In this
important period, it is necessary to enhance the innovation of
Chinese enterprises, realize the transformation of economic
development from factor-driven to innovation-driven, build a
modern economic system and realize high-quality sustainable
development. Innovation promotes productivity growth.
Enterprises can enhance their competitiveness because of
innovation, and the country cannot leave the support of
innovation.
Corporate innovation is inseparable from the continuous
investment of various resources, and enterprises must invest
human resources to make progress in corporate innovation.
Innovation cannot leave the support of talent. Innovation
occurs only when motivated and innovative people translate
their innovative ideas into new products and services. In the
previous period, innovation was mainly guided and
implemented by scientists, but now innovation activities are
not only completed by scientists. Innovation activities are
usually group activities, in which each person has his or her
own different tasks, and each person needs to work together
to complete the innovation activities at this stage. From this
perspective, the existing literature mainly takes the
management as the research object, and mainly aims at
controlling the management to promote corporate innovation
(Zhang et al., 2018). However, at the current stage, China's
researches rarely mention the other important staff in
enterprises, that is, the role played by employees in corporate
innovation (Ding et al., 2020). Enterprises are important
subjects for the country to implement innovation, and
employees are important members to generate and implement
innovation. The innovation behavior of employees is a huge
advantage for enterprises to continuously compete with other
competitors. The motivation and vitality of employees in
enterprises to innovate is an important factor to improve the
innovation ability of enterprises. The most effective way for
enterprises to motivate employees to innovate is not to care
about the short-term failures, but to motivate employees for
the long-term benefits. Innovation in enterprises needs to
mobilize the enthusiasm of all employees, stimulate their
creativity and explore their potential, so as to promote the
innovation of enterprises. Employees in the enterprises are the
top priority of corporate innovation. Therefore, it is necessary
to explore and deepen the further research on corporate
innovation based on employees.
ESOPs are important methods for the enterprises to give
stock or option rewards to talents and employees with
contributions, which can encourage them to create more value
for the enterprises. This measure is conducive to improving
the distribution mechanism, so that the interests of capital
owners and ordinary staff are consistent (Huang and Jiao,
2019). The China Securities Regulatory Commission
officially issued the Guidance on the Pilot Implementation of
Employee Stock Ownership Plan by listed companies in 2014.
The promotion of the ESOPs’ pilots is conducive to the
establishment and improvement of the benefit sharing
mechanism among employees, enhancing the level of
corporate governance and strengthening the cohesion among
employees. The scope of ESOPs is very wide, including not
only core members and executives, but also more non-core
employees. It is more conducive to aligning the interests of
executives and ordinary employees, mobilizing the
enthusiasm of employees to actively participate in the daily
operation and management of the enterprises and various
innovation activities, so as to enhance the innovation ability
of the enterprises. Enterprises rarely disclose employees'
information to a certain extent in practice, so it is difficult to
examine the impact of ESOPs on corporate innovation.
However, the implementation of ESOPs in Chinese listed
companies has changed this situation, and the further
disclosure of employees’ information has solved this problem.
The “Guidance” issued in 2014 has been well implemented
and actively adopted by listed companies in China. By the end

55
of 2017, 635 A-share listed companies had implemented
ESOPs successively. The incentive motivation for employees
refers to letting employees hold the company's stock for a
long time, so that the conflicts of interest between employees
and shareholders can be reduced. Therefore, employees and
shareholders in companies have the same interest drive,
which can greatly mobilize employees' enthusiasm for work
and make the company's performance targets easier to achieve
(Chen et al., 2020). In addition to incentive motives, there are
also non-incentive motives, which is the consideration of the
role of systems and policies, because enterprises will also
adopt ESOPs to reduce tax pressure and fight against hostile
takeovers. Before the adoption of ESOPs, employees can only
receive a certain fixed salary and cannot enjoy the rights of
residual earnings of enterprises. As a result, employees are not
able to fully devote their efforts to work and only willing to
pay part of their efforts to meet the salary standard, which
makes them have no sense of belonging to the companies and
do not consider the problem of improving the long-term value
of the companies.
ESOPs enable employees to own the ownership and
residual earnings of enterprises, which can make them more
willing to work hard with enthusiasm (Cao and Zhang, 2020),
strengthen the team collaboration (Huang and Jiao, 2019) and
enhance the ability of supervision (Cao and Zhang, 2020).
ESOPs also give employees the motivation to pay attention to
the long-term value of enterprises.
The previous literature has examined the relationship
between ESOPs and corporate innovation, but most of them
are from the perspective of managers. ESOPs are open to the
ordinary employees. Employees play an important role in the
process of corporate innovation. Therefore, this paper takes
A-share listed companies that have implemented ESOPs from
2014 to 2021 as samples to study the impact of ESOPs on
corporate innovation. The innovative points of this paper lie
in the following aspects: (1) The main literature examines the
relevant factors affecting corporate innovation from the
perspective of management at this stage. Although some
literature mentions the relationship between ESOPs and
corporate innovation, it is also studied from the perspective of
management (Zhou et al., 2019). Different from the existing
literature, this paper studies the impact of ESOPs on the
corporate innovation output from the perspective of
employees, which extends and deeply studies the literature on
the effect of ESOPs on enterprise innovation; (2) There is
only a preliminary study on the implementation of ESOPs at
this stage. In addition, our country once launched ESOPs, but
it caused the negative phenomena such as the insider trading
and the losses of assets. Due to the imperfection of relevant
laws and regulations, while the inadequate implementation of
relevant laws and regulations occurred, there are many
defects in the implementation processes, so this system
cannot be carried out well. The China Securities Regulatory
Commission carried out ESOPs again in our country in 2014.
This paper studies how to promote corporate innovation from
the perspective of ESOPs. The content of this paper enriches
the literature on corporate innovation and ESOPs. It provides
the theoretical support for Chinese enterprises to enhance
innovation during the period of changing development mode,
and also provides the empirical evidence for Chinese
enterprises to implement ESOPs.
2. Literature review
2.1. Literature on corporate innovation
While corporate innovation has high returns, it also has to
bear relatively high risks. Motivated by the salary difference
between key subordinate executives and chief executive
officers, they have higher enthusiasm for innovation, which
makes enterprises have more innovation output (Zhang et al.,
2020). The positive relationship between the employee
protection and corporate innovation capability is more
obvious in enterprises with trade unions (Tong et al., 2018).
With constant upgrades in technological capability, the level
of innovation is an important factor that allows a firm to have
competition with other firms. A relatively stable team of top
management will enable enterprises to have a relatively high
level of tacit understanding when making decisions about
innovation, and they will have the same actions in innovation
activities to improve innovation efficiency (Zhang et al.,
2018). Institutional investors in enterprises can promote the
output of corporate innovation (Balsmeier et al., 2017).
Institutional investors also reduce the short-sighted behavior
of management, and the period of investment injection is
positively correlated with the number of patents (Kim et al.,
2019). At the present stage of China's economic development,
the introduction of foreign banks can bring sufficient capital,
advanced technology and management methods, while the
spillover effect is adopted to rapidly improve the innovation
efficiency and innovation output of Chinese enterprises (Bai
et al., 2018).
2.2. Literature on ESOPs
When enterprises implement ESOPs, the market can have
a relatively positive response (Chen et al., 2020), which
promotes the improvement of enterprise productivity and
performance (Shen et al., 2018). ESOPs enable employees to
have dual identities of insiders and owners of the enterprise,
and have the motivation and ability to participate in the
operation and management of the enterprise, which shows
that ESOPs alleviate the conflicts of interest between the
employees and major shareholders (Shen et al., 2018).
2.3. ESOPs and corporate innovation
Zhou et al. (2019) explain the impact of the implementation
of ESOPs in A-share listed companies on corporate
innovation, and the main research object is all employees
including the management. When the number of employees
covered by ESOPs increases, the scale of capital and the
proportion of management subscription increases, and the
lock-up period becomes longer. Therefore, the number of
invention patents and patent applications of enterprises will
increase, and the innovation ability will be enhanced. ESOPs
promote corporate innovation by reducing agency costs and
improving enterprises' ability to take risks. The higher the per
capita subscription ratio of executives is, the more likely it is
for executives to avoid their own opportunistic behaviors,
which can reduce agency costs and promote corporate
innovation. The development of ESOPs in listed companies
can enable the owners of enterprises and employees to share
the interests, and bind the interests of employees with the
long-term interests of enterprises, which can reduce agency
costs and improve innovation ability (Zhou et al., 2019).
Meng et al. (2019) use the data of A-share listed companies
from 2011 to 2017 to test the relationship between non-senior
management employees and corporate innovation in the

56
implementation of ESOPs, and explain that the shareholding
of non-senior management employees is conducive to
corporate innovation by increasing employees' enthusiasm for
work, efforts and teamwork ability, so the efficiency of
corporate innovation is improved. Meanwhile, when the
proportion of employees with higher education and technical
level is large, the output of corporate innovation can be
increased. Employees can generate more innovative ideas
when providing products and services (Bradley et al., 2016).
When ESOPs promote corporate innovation, the main effect
is generated by the shareholding of non-senior management
employees rather than the management (Meng et al., 2019).
The shareholding of non-senior management employees has
a significantly positive impact on the quantity and quality of
corporate innovation output, and the implementation of
ESOPs in non-state firms can better promote corporate
innovation output than that in state-owned enterprises (Huang
and Jiao, 2019).
3. Theoretical analysis and hypothesis
development
The idea of ESOPs is derived from the two-factor theory
(Kelso and Adler, 1958). The two-factor theory shows that
capital and labor play an important role in creating wealth as
two important factors, but the development of
industrialization has made the distribution of wealth uneven,
and the status of capital is much higher than that of labor,
which has gradually widened the gap between the rich and the
poor. Therefore, ESOPs are institutional designs that can be
combined with the two-factor theory, which are strategic
designs that can make labor workers become capital workers.
The measure can allow labor workers to have the attributes of
capital in order to reduce class contradictions. From the
perspective of shareholders, innovation can enhance the
competitiveness of enterprises and thus increase long-term
wealth. From the perspective of employees, innovation
activities with the high complexity and large investments in
enterprises require employees to pay more efforts than their
daily work. If employees only receive fixed wages without
enterprise ownership and residual income claim, they will not
benefit from innovation activities, which will prevent
employees from making more effort in the innovation work
of enterprises. From the perspective of the two-factor theory,
ESOPs are used as a type of incentive factors, which
motivates employees to produce positive results and improves
their enthusiasm in work to improve their work performance.
In addition, ESOPs enable employees to hold shares of
companies and become one of the owners of companies,
which enables employees to take the initiative to participate
in work and be more willing to take responsibilities. In
addition to wages, employees can also enjoy the benefits of
the economic growth, which can reduce the social
contradictions caused by the gap between the rich and the
poor. Employees enjoy the identities of enterprises’ owners
and employees at the same time, which binds the interests of
employees and shareholders, and connects employees'
personal wealth with the long-term innovation output of
enterprises. As the benefits of innovation output increase, the
personal wealth of employees will increase rapidly.
Meanwhile, it also reduces the possibility of employees'
dismission and improves employees' efforts in innovation
work (Paterson and Welbourne, 2019). In this way, employees
can have a stronger willingness to participate in work,
actively improve products and services, strive to continuously
complete innovation decisions and pay more attention to the
long-term benefits of enterprises, which can promote the
effective transformation of corporate innovation input into
innovation output.
The principal-agent theory explains that the principal-agent
relationship is defined as the principal hires an agent to sign a
contract on behalf of the principal to make some decisions
(Jensen and Meckling, 1976). The separation of the
ownership and management rights between the agent and the
principal will cause the problem of information asymmetry,
which will cause the inconsistency of the interests of the agent
and the principal. With the higher level of economic
development in China, the competition among Chinese
enterprises is becoming more and more fierce, so companies
have become more concerned about the importance of human
capital to add value to companies. There is not only the
principal-agent problem between senior executives and
shareholders, but also the principal-agent problem among
employees, senior executives and shareholders in the
operation of a company. A complete principle-agent chain
includes shareholders, senior executives and employees. The
shareholders are the ultimate principals. The management is
the agent of the shareholder and the principal of the
employees, and the employees are the ultimate agents.
Although employees are at the bottom of the whole agency
chain, their teamwork and efforts are closely related to the
value realized by shareholders. Executives are the main body
of innovation decisions, while employees are important roles
in implementing innovation decisions. Employees are directly
related to increasing the value of companies. Senior
executives are the objects of resource investments and
allocation in enterprises, while employees are the direct users
of corporate resources. The value a company can create is
related to the effort level and ability level of its employees. It
is necessary to adopt a long-term incentive scheme of ESOPs
to reduce agency costs. Team collaboration can improve
employee cohesion and can improve the quality of innovation
output in innovation activities. Establishing common goals of
departments at different levels in the companies can promote
team collaboration and mobilize the enthusiasm of employees
and the motivation of mutual communication and cooperation,
which can improve the efficiency of transforming innovation
input into innovation output, thus enhancing the long-term
value of the enterprises and the personal wealth of employees.
Employees feel enhanced self-esteem and importance in their
roles and promote stronger social relationships with
colleagues (Mullins et al., 2019). The mutual binding of
wealth enables employees to supervise each other and avoid
the loss of collective wealth (Fang et al., 2015). Hence,
hypothesis 1 of this paper is proposed:
H1: The implementation of ESOPs can promote corporate
innovation output.
4. Research design
4.1. Sample and data
This paper takes A-share listed companies that have issued
ESOPs from 2014 to 2021 as the research objects. This paper
uses 2014 as the first year of the sample period because the
“Guidance” was issued in China in 2014. This paper excludes
the following samples: (1) the sample of ST, PT and ∗ST
listed companies in the sample period; (2) the sample data of
financial listed companies; (3) listed firms with missing data;

57
(4) listed companies that have declared or passed the plans of
the board of directors but actually stopped implementing their
employee stock ownership plans or that failed to pass the
plans at the shareholders’ meeting. The final sample consists
of 1046 firm-year observations.
To reduce the impact of extreme outliers, this paper
winsorizes all of the continuous variables at the 1st and 99th
percentiles. This paper obtains the data of ESOPs from the
Wind database, and other relevant data are from the CSMAR
database.
4.2. Model specification
In order to test hypothesis 1, regression model (1) is
established. If β1 is significantly positive, the implementation
of ESOPs can promote corporate innovation output, and H1
is supported. The design of model (1) is as follows:
Innoi,t = β0+β1ESOPi,t+β2Controlsi,t+Indi,t+Yeari,t+εi,t
(1)
4.3. Variable Design
4.3.1. Dependent variable
The dependent variable is corporate innovation (Inno). This
paper uses the number of patents granted by enterprises in the
current year (Inno) to measure innovation output (Meng et al.,
2019). The corporate innovation output variable is processed
by adding 1 to take the natural logarithm in the empirical
study.
4.3.2. Independent variable
The independent variable is employee stock ownership
plans (ESOP). The paper uses a dummy variable (ESOP) to
measure the implementation of ESOPs. The year when the
board of directors puts forward the implementation plans and
subsequent years shall be regarded as the implementation of
ESOPs, and the value within these years shall be 1, otherwise
the value shall be 0 (Yu et al., 2022).
4.3.3. Control variables
Combined with previous literature studies (Yu et al., 2022;
Meng et al., 2019), this paper controls the following
influencing factors: firm size (Size), the leverage ratio (Lev),
corporate growth (Growth), the return on total assets (ROA),
management shareholding ratio (Mnghold), the shareholding
ratio of top five shareholders (H5), property right nature (SOE)
and the total asset turnover (ATO). Finally, the industry and
year dummy variables also need to be controlled. The variable
definitions in this paper are shown in Table 1.
5. Analysis of empirical results
5.1. Descriptive statistics
Table 2 presents the descriptive statistics of the variables.
It can be seen from Table 2 that the maximum value of the
number of patents granted (Inno), which represents the
innovation output of enterprises, is 6.4998. The minimum
value is 0, and the standard deviation is 1.8377, which
indicates that there are certain differences in the innovation
levels of the sample enterprises. The average value of whether
the employee stock ownership plans (ESOP) is implemented
is 0.6424, indicating that 64.24% of the enterprises in the
sample implement ESOPs. The mean value of the managerial
shareholding ratios (Mnghold) is 0.1942, the minimum value
is 0 and the maximum value is 0.6766. The standard deviation
is 0.1946, indicating that there are significant differences in
the managerial shareholding ratio among the sample
companies. In addition, a variance inflation factor (VIF) test
is conducted, which shows that the VIFs of all the explanatory
variables are smaller than 10, indicating no issues of
multicollinearity.
Table 1. Definition of main variables
Variable
Symbol
Variable Definition
Variable Measure
Inno
Corporate
innovation
Ln (1+ the number of patents
granted)
ESOP
Employee stock
ownership plans
Dummy variable, the value of the
time ranges from the year when the
board of directors proposes the
implementation plans to the last
year is 1, and the value of the years
before the implementation is 0
Size
Firm size
Natural logarithm of total assets
ROA
The return on total
assets
Net profit/total assets
Lev
The leverage ratio
Total liabilities/total assets
Growth
Corporate growth
The firm’s operating income
growth rate
ATO
The total asset
turnover
Operating income/average total
assets
H5
The shareholding
ratio of top five
shareholders
The shareholding ratio of top five
shareholders
SOE
Property right
nature
Dummy variable, the value is 1
when the enterprise is state-owned,
and 0 otherwise
Mnghold
Management
shareholding ratio
The ratio of the number of shares
held by the management to the total
number of shares.
Year
Year
Dummy variable
Ind
Industry
Dummy variable
Table 2. Descriptive statistics
Variables
N
Mean
SD
Min
Max
Inno
1,046
2.5912
1.8377
0
6.4998
ESOP
1,046
0.6424
0.4795
0
1
Size
1,046
22.1508
1.0796
20.0433
25.2144
ROA
1,046
0.0446
0.0610
-0.2607
0.1856
Lev
1,046
0.3863
0.1810
0.0721
0.8025
Growth
1,046
0.1809
0.2964
-0.3908
1.5146
ATO
1,046
0.6117
0.2848
0.1424
1.5138
H5
1,046
0.5025
0.1315
0.2238
0.7966
SOE
1,046
0.1205
0.3257
0
1
Mnghold
1,046
0.1942
0.1946
0
0.6766
5.2. Analysis of regression results
Model (1) tests the relationship between the
implementation of ESOPs and corporate innovation output.
The regression results are shown in Table 3. The results show
that the coefficient of ESOPs is 0.262, which is significantly
positive at the 5% level, indicating that the implementation of
ESOPs can significantly promote the innovation output of
enterprises. Hypothesis H1 is verified.
6. Robustness tests
This paper conducts the following robustness tests: (1) In
order to reduce the impact of omitted variables on the research
results, this paper adds two control variables of the proportion
of independent directors (Indep) and duality (Dual) on the
basis of Model (1). The definition of the proportion of
independent directors (Indep) is the ratio of the number of
independent directors to the total number of directors. Duality
(Dual) is the dummy variable, which equals 1 if the chairman
and the general manager are the same person, and 0 otherwise.
The regression results are shown in Table 4. (2) In order to
ensure the robustness of the research results, this paper
eliminates the samples with the number of patents granted

58
being 0, and only keeps the sample companies with
innovation needs for the regression analysis. The regression
results are shown in Table 5. The robustness test results
indicate that the research conclusion of this paper is still
robust.
Table 3. ESOPs and corporate innovation output
Variables
Inno
ESOP
0.262**
(1.99)
Size
0.650***
(9.13)
ROA
2.408**
(2.30)
Lev
0.121
(0.27)
Growth
-0.042
(-0.23)
ATO
-0.205
(-0.86)
H5
0.850*
(1.96)
SOE
-0.025
(-0.14)
Mnghold
0.226
(0.74)
Constant
-14.806***
(-8.69)
Year
Yes
Ind
Yes
N
1,046
Adj. R2
0.255
Note: The numbers in brackets are t-statistics.
*, ** and *** denote statistical significance at
the 10%, 5% and 1% levels, respectively.
Table 4. Adding control variables
Variables
Inno
ESOP
0.280**
(2.11)
Size
0.626***
(8.66)
ROA
2.465**
(2.35)
Lev
0.136
(0.30)
Growth
-0.049
(-0.26)
ATO
-0.220
(-0.91)
H5
0.880**
(2.01)
SOE
-0.050
(-0.27)
Mnghold
0.189
(0.61)
Dual
0.057
(0.49)
Indep
-1.645
(-1.58)
Constant
-13.570***
(-7.44)
Year
Yes
Ind
Yes
N
1,038
Adj. R2
0.252
Note: The numbers in brackets are t-statistics.
*, ** and *** denote statistical significance at
the 10%, 5% and 1% levels, respectively.
Table 5. Eliminating the samples with the number of patents
granted being 0
Variables
Inno
ESOP
0.243***
(2.59)
Size
0.729***
(14.41)
ROA
-0.374
(-0.48)
Lev
-0.834***
(-2.62)
Growth
-0.119
(-0.91)
ATO
0.766***
(4.18)
H5
0.422
(1.40)
SOE
-0.300**
(-2.36)
Mnghold
0.188
(0.87)
Constant
-12.856***
(-8.83)
Year
Yes
Ind
Yes
N
785
Adj. R2
0.392
Note: The numbers in brackets are t-statistics.
*, ** and *** denote statistical significance at
the 10%, 5% and 1% levels, respectively.
7. Conclusion
This paper selects A-share listed companies that have
implemented ESOPs from 2014 to 2021 as research samples
to empirically test the impact of ESOPs on corporate
innovation output. The results show that ESOPs can
significantly promote corporate innovation output.
This study has the following implications. Firstly, ESOPs
have been carried out in Chinese listed enterprises
successively, and innovation incentive degrees of ESOPs are
also affected by the market environment and enterprise types.
Enterprises should be guided to carry out relevant work
reasonably based on their own conditions to ensure that
ESOPs can effectively bring the incentive effects.
Additionally, we should improve the external supervision
system for implementing ESOPs. The formulation of relevant
laws and regulations should be further accelerated in order to
provide more powerful institutional guarantees for the
implementation of ESOPs. Finally, the key to the
implementation of ESOPs is to provide benefits to ordinary
employees. Enterprises should give more consideration to
schemes benefiting ordinary employees to ensure that ESOPs
can bring incentive effects in the actual implementation of
innovation activities.
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