ESOPs and earnings management: An empirical note

This study seeks to ascertain the impact of employee stock ownership plans (ESOPs) on earnings management. The empirical evidence shows that firms with larger ESOP ownership exhibit a lower degree of earnings management. I suggest that this is the case because ESOPs motivate employees to monitor management, hence, reducing managerial opportunism in the form of earnings management. Besides, ESOPs may act as a takeover defence and help managers take the long-term view of the firm, thus, lessening the motivation for short-term transient earnings distortion. Finally, there is evidence that ESOP ownership alleviates earnings management only in firms where outside blockholders are present.