The Role of ESOPs in Takeover Contests




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    • Chaplinsky is from the Colgate Darden Graduate School of Business Administration, University of Virginia, and Niehaus is from the College of Business Administration, University of South Carolina. We acknowledge the comments of David Brown, Harry DeAngelo, Larry Dann, Richard Ippolito, Richard Jeffries, Sreenivas Kamma, Rod Roenfeldt, Mike Ryngaert, Edward Snyder, René Stulz (the editor), and two anonymous referees. We thank Dave Mayers and Saeyoung Chang for their takeover-related ESOP sample and Robert Comment for his merger and tender-offer database. M. Nimalendran, Andy Terry, Bill Tucker, and Linda Van de Gucht provided valuable research assistance.


This article examines both the shareholder wealth effects of employee stock ownership plans (ESOPs) announced by firms subject to takeover pressure and the takeover incidence of targets with and without ESOPs. Although we do not find that defensive ESOPs significantly reduce shareholder wealth on average, we identify two factors—the change in managerial and employee ownership due to the ESOP and the simultaneous announcement of other defensive tactics—that are associated with negative stock price reactions. We find that ESOPs are strong deterrents to takeover. ESOP targets that are acquired earn higher returns than targets without ESOPs, but the difference is not statistically significant.