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An Empirical Investigation of the Association of Productivity with Employee Stock Ownership Plans

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The Internal Revenue Code has provided a number of tax benefits for firms adopting employee stock ownership plans (ESOPs), especially leveraged ESOPs. According to The Wall Street Journal, ESOPs are one of the hottest corporate tax dodges going" (Smith 1987, 50). The Treasury Department is of the opinion that tax benefits afforded to ESOPs may not be justified either by the role of ESOPs as retirement plans or their aggregate effect on corporate performance, and that further study of the appropriateness of these additional tax benefits should be undertaken (Wilkins 1989, L-29). Table 1 lists the major ESOP tax benefits. Congress recently repealed many of these benefits. However, the dividend deduction provision remains substantially unchanged. This deduction is generally regarded as the major incentive for corporations to set up ESOPs. As a result, the statutory changes will probably have little effect on the growth of ESOPs (National Center for Employee Ownership 1989, 6).

Although ESOPs were introduced into the tax law for the primary purpose of broadening ownership of wealth (Blasi 1988, 18), they were intended to lead to the creation of new wealth rather than to the redistribution of existing wealth. The new wealth would result from the increased productivity of the firm. Because an ESOP is a retirement plan that invests primarily in employer securities, it links the employees' retirement wealth to the company's stock performance.(1) This expectation that employees with an equity stake will be motivated to work harder and productivity will increase was a major reason that Congress encouraged the adoption of ESOPs. Blasi (1988, 23) states, "The promise of improved economic performance with the ESOP was not incidental to the program it was the justification for it."

One objective of empirical researchers who examine tax provisions is to determine if such provisions are accomplishing the...