Do employee owners deter firms from withholding bad news? Evidence from Korea

Shin Hyejeong and Heejin Park

Journal of Derivatives and Quantitative Studies: ????????????, 2026, vol. 34, issue 3, 202-220

Abstract: Stock price crashes, often triggered by the hoarding and sudden release of bad news, pose severe risks to investors and market stability. While prior research has investigated various governance mechanisms that constrain managerial bad-news hoarding, the role of employee share ownership (ESO) remains underexplored. This gap is particularly pronounced in Korea, where ESO is organized through employee associations under distinctive institutional rules, such as short mandatory lock-up periods and a unique division between mandatory allotments for Korea Composite Stock Price Index (KOSPI) firms and voluntary adoption for Korea Securities Dealers Automated Quotation (KOSDAQ) firms. Using a large sample of 16,929 firm-year observations from 2011 to 2020, we examine whether ESO mitigates future stock price crash risk. We find that ESO is negatively associated with crash risk, but this effect is more pronounced in KOSDAQ firms, where employee participation is voluntary. Additional analyses reveal that the mitigating effect of ESO is stronger in firms operating in volatile industries, in firms with high information opacity and in firms with less concentrated controlling ownership. These results are robust to alternative model specifications and propensity score matching. Our findings highlight that ESO operates as an internal governance mechanism that curbs managerial incentives to hoard bad news and enhances transparency. By linking the unique Korean ESO system to crash risk outcomes, this study extends the ESO literature beyond disclosure quality and contributes to a broader understanding of how employee ownership can mitigate extreme downside risks in capital markets.

Keywords: Employee stock ownership; Stock price crash risk; Agency problem; Rent seeking (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jdqspp:jdqs-12-2025-0089

DOI: 10.1108/JDQS-12-2025-0089

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