Employee incentive and stock liquidity: Evidence from a quasi-natural experiment in China

This study seeks to understand the stock market reaction to Employee Stock Ownership Plans (ESOP), which is vital in corporate governance. ESOP aligns the interests of employees and shareholders since employee compensation is highly linked to the company’s stock price, thus, employees are motivated to act in the interests of the company. However, the market reaction to ESOP is still unclear, thus, this paper attempts to investigate their relationship. Taking the Guiding Opinions on the Pilot Implementation of Employee Stock Ownership Plans by Listed Companies in China as a quasi-natural experiment, this paper investigates the impact of ESOP on stock liquidity. Our empirical results show that stock liquidity decreases with the implementation of ESOP, our impact mechanism analysis show that this negative impact is mediated by accounting information quality. Moreover, ownership concentration will mitigate the impact of ESOP whereas executives’ compensation will enhance it. In addition, the negative impact of ESOP is more pronounced for state-owned firms and high-tech ones.