Employee Stock Ownership and the Cost of Equity in Japanese Electronics Firms

Conflicts of interest between a firm's outside stockholders and employees will, in an efficient capital market, be reflected in a firm's cost of equity. Employee stock ownership reduces these conflicts by making the wealth of both outside stock holders and employees depend, to some extent, on the market value of a firm's stock. These reduced conflicts will, in an efficient capital market, be reflected in a lower cost of equity capital. Empirical implications of this argument are tested using a sample of Japanese electronics firms.