Do Nonexecutive Employees Have Valuable Information? Evidence from Employee Stock Purchase Plans

Ilona Babenko () and Rik Sen ()
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Ilona Babenko: Department of Finance, W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287
Rik Sen: Department of Finance, HKUST Business School, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong; and Department of Finance, School of Business Administration, University of Miami, Coral Gables, Florida 33124

Management Science, 2016, vol. 62, issue 7, 1878-1898

Abstract: Using novel data on employee stock purchase plans (ESPPs), we show that aggregate purchases of company stock by lower-level employees predict future stock returns. Firms in the top quartile of ESPP purchases outperform those in the bottom quartile by 10% in the year after purchase. The relation between ESPP purchases and future stock returns is stronger for firms with high information asymmetry. Furthermore, we find that high ESPP purchases are associated with a lower likelihood of breaks in strings of consecutive earnings increases, as well as higher future sales growth and more innovation. These findings support the hypothesis that lower-level employees have information about future firm performance. We examine and reject a number of alternative explanations. Our results have implications for firms using employees as a source of capital, accounting issues related to expensing of equity-based compensation, and disclosure policy.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2226 . This paper was accepted by Wei Jiang, finance .

Keywords: insider trading; ESPP; nonexecutive compensation; return predictability (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (17)

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