Employee Stock Ownership and Participation in South Korea:
Incidence, Productivity Effects, and Prospects
Beom-cheol Cin* and Stephen C. Smith**
Revised, September, 2001
Abstract
This paper examines employee stock ownership plans in South Korea. The incidence and characteristics of ESOPs in publicly traded manufacturing firms is reported. Korean employees do not participate in ESOPs either financially or in decision-making to the extent they could under the law. Evidence that tax incentives have very large effects on ESOP purchases is presented. Econometric estimates suggest that an increase in an average ESOP from 2% to 3% of total shares would lead to an increase in output of 2.6%. These results are broadly consistent with OECD countries, despite the smaller ownership shared and weaker employee decision-making participation in Korea. The policy analysis concludes that ESOPs in Korea are not suitable for pensions; purchasing all shares through IPOs and SEOs is inappropriate; incentives for longer stock holding periods may be desirable; improvement in decision-making participation is needed; and changes in repayment methods improve attractiveness for employees to purchase shares.
*Kyonggi University and **George Washington University. We would like to thank Andrew Weiss, two anonymous referees and participants at the Tenth International IAFEP Conference, University of Trento, Italy, July, 2000, and the Northeast Universities Development Conference, Boston University, Sept. 2001, for their valuable comments. Address correspondence to: Stephen C. Smith, George Washington University, Department of Economics, 624 Funger Hall, 2201 G St. NW, Washington, D.C. 20052, (e-mail) scsmith@gwu.edu.
1. Introduction
This paper examines employee stock ownership and participation in South Korea. We describe the institutional history of Korean ESOPs, which is almost completely unknown outside of Korea, and report on their incidence and the effect of tax policy on participation rates. We then use company financial data to estimate their productivity effects. We also consider ways to improve their future prospects through policy reform.
The paper is organized as follows. In section 2, we provide an overview of ESOP regulations and incentives in South Korea, as they have evolved over the last 40 years and as they exist today. We attempt to explain the reasons for the large number of policy changes that have occurred, particularly in recent years, and consider the likely incentive effects of these changes.
In Section 3, we consider trends in the overall incidence of publicly traded as well as closely held ESOPs in Korea, the methods of their finance, and the extent of employee financial participation. After a steady rise in employee ownership since the 1960s, we find a striking decline in the number, average ownership share, rate of employee participation, and length of time holding shares, in ESOPs, particularly since the onset of the financial crisis in 1997, but likely predating it to some extent. Tax policy is found to have a very strong effect on ESOP participation levels. We find that employees do not participate either financially or in decision making to nearly the extent that they could under the law.
In Section 4, we offer an econometric analysis of the productivity effects of Korean ESOPs. Somewhat surprisingly, given the lower incentives and decision making participation found in Korean ESOPs, we find that the productivity benefits of ESOPs in Korea are broadly similar to those estimated for the U.S. and Japan in previous research. Reasons for these findings are considered.
In Section 5, we present an analysis of Korean ESOP policies. We conclude (1) that ESOPs as designed in Korea are not suitable instruments for employee pensions; (2) that it is not in employee interests to purchase (all of) their shares at the time of an initial public offering (IPO) or seasoned equity offering (SEO), as is current practice, because share prices tend to be relatively high at those times, and that it would be more prudent to acquire ESOP shares over time on a dollar cost averaging basis; (3) that incentives for longer employee holding periods may be appropriate; (4) that an improvement in employee participation at the workplace level and reforms encouraging the use of voting rights would complement the effects of ESOPs; and (5) that changes in repayment methods could make it more attractive for employees to purchase shares. The role of and strategies for expanded ESOPs in restructuring Korea's chaebol (conglomerate groups) is also discussed. Section 6 concludes.
2. ESOP Regulations and Incentives in Korea
Employee Stock Ownership Plans play a significant role in the Korean economy, but they are not well known outside of Korea. ESOPs ("ulisaju" in Korean) have operated in South Korea since at least 1958. Beginning in that year, Yoo-Han Yang-Haeng Corporation (a major pharmaceutical manufacturer) provided executives and workers with common stock as a wage bonus to boost work effort. Subsequently, there were several imitators; but the use of ESOPs did not become widespread until government policy initiatives began in the late 1960s.
In 1968, the government established the Capital Market Development Law which included a provision that companies listed on the Korean Stock Exchange must give its employees the right of first refusal (in the form of a type of call option, but without paying an option premium) to purchase 10% of newly issued common stock. This law was revised in 1972 to stipulate that publicly traded companies should offer employees the option of purchasing 10% of outstanding stocks as well as new issues, while closely held companies must provide employees with the right of first refusal on 10% of initial issues.
From the standpoint of the development of ESOPs, the July 1974 amendments to this law, under the rubrick of the "Measure for Enlargement and Implementation of ESOPs," were most important. The motivations were two-fold. First, government had been seeking to develop capital markets in general and equity markets in particular to facilitate the growing demand for corporate finance. In particular, ESOPs were envisioned as a method to facilitate IPOs by family-run firms. Additionally, ESOPs were explicitly viewed as a vehicle to help redress the growing and potentially destabilizing concentration of wealth by broadening employee share ownership. This law included four important stipulations: (1) publicly listed companies should establish Employee Stock Ownership Associations (ESOAs), similar to U.S. ESOP trusts, to manage ESOP stock; (2) the government would provide employees with a tax credit equal to 5% of the value of ESOP stock purchased; (3) unlisted firms must also give employees the option to purchase 10% of (private placements of) newly issued stock, to be held in trust; (4) publicly held companies must hold the ESOP stock in the ESOA trustee Korea Stock and Finance Corporation (KSFC), for one year; but a closely held (or unlisted) company must hold the stock at least until the company goes public. As we will see in Section 3, tax policy had large apparent effects on ESOP purchases.
In September1987, as part of the Market Promotion Act the law was revised again, to define the purposes of the ESOA, provisions of eligibility for ESOA membership, legal provisions for the primary purchasing option, and to provide tax incentives. In particular, the amendments increased the primary purchase option to 20%; and increased the tax deduction rate from 5% to 15% of the cost of the ESOP purchase.
By 1988, it had become clear that while ESOPs might be helping to broaden wealth somewhat, employees were holding their shares for too short a period of time to achieve such potential benefits as improving firm-level productivity, and promoting social stability through broad share ownership. Thus, in June 1988, the rules were modified to require employees to hold ESOP stock in the KSFC trust until they retire or otherwise leave their company; but they were allowed to redeem their ESOP stock three years after purchase in some special circumstances such as the purchase of housing, medical, funeral, marriage, and schooling expenses, and 'recovery from disasters.' In July 1993, this compulsory holding time was reduced to 7 years for all employees but just two years in the special cases. In 1988, the government also promulgated the "standard agreement" for ESOAs, including general purposes, composition of representatives, selection of the ESOP trustees, the structure of voting rights, and the allocation schedule of the ESOP shares. Importantly, some of the tax deduction provisions were abolished in 1996.
In a final change, when the Capital Market Development Law was abolished in April 1997, ESOP benefits were scaled back, and the remaining ESOP provisions were then included as a section of the Stock Exchange Law. This placement has proven somewhat controversial, however. Because ESOP institutions were considered to not be working well, the April 1997 measures also included provisions for a greatly expanded, broad-based employee stock options program, as well as facilitation of employee buy-outs in certain circumstances.
Under the current law, participation in any established ESOP is open to every employee except the board of directors, top executives, and part-time and temporary workers who have been working in the firm for less than three months (but less than one year in the construction industry). In addition, individual members of the ESOA must fall under the category of minority stockholders, holding less than 1% or 3% of total shares in the Business Law as revised in Dec. 1998. ESOP participants enjoy the same rights and responsibilities as other minority shareholders, such as cumulative voting rights on selecting the board of directors and security-holders' proposals, and the right to convene a shareholders' general meeting. It should be noted that workers in chaebol subsidiaries are generally only eligible to participate in the plan of their own subsidiary, and not in the plans of the chaebol parent company or its other subsidiaries.
Unlike Japanese companies, Korean companies establishing an ESOP do continue to receive some tax advantages. The Korean government allows companies establishing an ESOP to exclude from corporate income administrative costs and any brokerage fees incurred in employee stock purchases. Moreover, when the company makes either interest-free or reduced-interest loans for employees to purchase stock through the ESOA, the interest on the ESOP loans are also excluded from corporate income to the extent of the subsidy.
Employees have also received three types of tax incentives to purchase ESOP shares; however, the first two were abolished in 1996. First, until 1996, if employees vested their ESOP stock in the KSFC trust for more than two years, only 6.5% of dividend income (up to 18,000,000 won) was taxable. Second, any savings deposited in the KSFC for the purchase of ESOP shares, or for installment payments on ESOP loans, were tax deductible. Further, the full value of any ESOP shares provided by the company in the form of either a wage bonus or as retirement funds were considered non-taxable. Moreover, given the worker's salary level, up to 15% of the combined value of bonus and retirement contributions could be subtracted from the employee's actual net tax liability, as a direct tax credit. The maximum amounts of the tax credit could not exceed 3,600,000 won per year for workers earning less than 7,200,000 won per year, and 30% of annual income for workers paid more than 7,200,000 won. Again, all of these tax advantages have now been abolished, and it is very difficult to find any official explanation for this. Third, donations of ESOP stock, as well as their inheritance due to a participant's death, are treated as non-taxable. The abolition of the first two tax incentives may of course partly explain the reasons for declining ESOP participation since 1996, as reviewed in the next section.
Almost all ESOP shares are voting common stock. ESOP shareholders can individually cast votes, on a one-share/one-vote basis, on all voting corporate issues as defined by Korean business law. Though apparently not stated explicitly in any law or regulation, employee voting rights do not appear to be curtailed in the case of leveraged ESOPs, or any case in which employees have not repaid loans for acquiring ESOP shares, from whatever source. ESOP shareholders can vest their voting rights, in the form of a written proxy, to other ESOA members.
Despite these rights, in practice, the chairman of the ESOA participates in the general shareholder meeting as a representative of the ESOA and casts the votes on issues as defined in the Business Law. But direct employee participation may be valued by many societies for the inherent value as well as for its widely reported efficiency effects, and for the benefits of providing ordinary workers with an expanded practice in up-close democracy or experience in the workings of a modern economy. Determining why employees have not exercised their voting rights in Korea, and whether this ought to be encouraged, would be an important subject for further study.
3. Trends in Incidence, Finance, Tax Effects, and Employee Participation
No government agency is charged with compiling information about ESOPs on a regular basis. As a result, detailed information on Korean ESOPs is not readily available. The descriptive information presented here is primarily drawn from KSFC reports, company annual reports, and questionnaires conducted by the Korea Listed Company Association in 1989 and 1998.
Available evidence suggests that the incidence of ESOP shares among listed companies in Korea increased in the period after incentives were introduced in the mid-1970s, rose dramatically in the stock boom of the late 1980s, and reached a peak in the mid-1990s before significantly falling during the financial crisis, with tax law playing a major role in these trends. Korean ESOPs had become a pervasive and significant phenomenon by the 1990s. In Table 1, we present summary statistics on the incidence of Korean ESOPs, showing the number of listed companies (Column 1), number of listed companies forming an ESOA (column 2), the percentage of listed firms with an ESOA (Column 3), and the percent of eligible employees participating in the ESOP program (Column 4). Before active incentives began in 1974, only 8 firms had established an ESOA; but by 1980, 346 companies had done so. By 1997, more than 99% of listed firms had formed an ESOA. As seen in column 4, employee participation rates also increased sharply, from 38.2% in 1974 to 76% in 1997, when nearly one million employees participated in ESOP programs in publicly traded companies.
Despite these long-term trends, Korean ESOPs have recently been in at least short-term decline. In Table 2, we report the distribution of Korean ESOPs by the share of stock held by employees. The table indicates that, overall, the fraction of ESOP shares in listed companies has decreased by one-quarter, from 2.4% in 1996 to 1.8% in 1998. Most strikingly, the table makes it clear that this decline is explained by the decreasing incidence of ESOP companies with more than 5% employee ownership. For example, while ESOPs with at least 10% employee ownership (EO) accounted for 9.0% of all ESOPs in 1996, by 1998 this share had fallen to just 6.7%. Similarly, the share of ESOPs holding between 5% and 10% ownership fell in this short period from 18.2% to 15.4%.
There are two apparent explanations for the decline in ESOPs in Korea in the last few years. Korea's 1997 financial crisis is probably one factor. In particular, laid-off workers may understandably have sought to redeem their ESOP shares, while others may have sold to increase precautionary liquidity (or, more emotionally, out of fear). Second, as discussed below the abolition of tax incentives in 1996 almost certainly has had some effect.
Korean companies have not taken up the slack: ESOPs have rarely been used as stock-bonus or profit-sharing plans. A company may make contributions to employees in cash or stock; and financial institutions may make loans to employees by using the ESOP stock as collateral. However, in practice, companies have made few contributions other than to offer the primary purchase option at a discounted price (this is not special to employee owners but is a usual practice for all existing owners when a company increases capital by issuing new stock), to make loans with or without interest, and to pay brokerage fees. Consequently, employees repay principal, or in some cases both principal and interest, on ESOP loans. Normally, repayment must be completed within 5 years.
A major goal of the 1988 reforms was to encourage employees to hold their ESOP shares for longer periods of time (though these requirements were relaxed in 1993). The evidence suggests that this has been ineffective in practice. As indicated in Table 3, nearly 58% of all ESOP shares had been held less than 3 years, while some three quarters had been held less than 4 years. The trends between listed and unlisted ESOPs are not qualitatively different. Recalling that the data in Table 2, as well as other evidence, suggests that the incidence of ESOPs and participation within them has remained rather flat in recent years, and noting that employment in Korea tends to be quite stable, the explanation for these low holding periods seems unavoidable: employees are finding the "special circumstances" for early withdrawal (reported in the previous section) to be a rather large loophole, and one that they have perceived to be in their interests to use.
There are three major sources of funds for purchasing ESOP shares: the employee's own savings or debts (including loans from relatives or banks using other assets as collateral), loans from the company (with or without interest), and special loans made by the KSFC and the Kookmin Bank, using purchased ESOP stocks as collateral. Korean ESOPs differ from U.S. ESOPs in that the loans are eventually repaid directly from the employees' own funds. Although fringe benefits are obviously fungible, this feature is at least a psychological barrier to participate, and may also reduce participation when employees face more stringent credit constraints than the firm. Thus stock purchase financing is an obvious candidate for ESOP law reform.
Table 4 shows the sources of funds for ESOP stock purchases. In the table, column (1) indicates the annual amounts of ESOP stock purchases. Here the effects of changes in the tax law are readily apparent. The data in Table 4 consistently suggest extraordinarily large effects of changes in the tax law (recalling the discussion of tax changes at the beginning of section 2). In 1984 some tax benefits were removed, and purchases fell the next year by 86%. In 1987 significant new benefits were added, and the value of ESOP purchases increased by 215% in 1987, and another 451% in 1988, the second highest and highest increases respectively. Then in 1988 lock-in restrictions were added, and after a lag (1989 purchase rates were essentially flat), purchases fell by 67% in 1990. In 1993, these participation constraints were relaxed somewhat, with a drop in the lock-in periods, and the value of purchases increased the next year by 126%. Finally in 1996 all subsidies were removed, and purchases the next year fell by 51%. The frequent changes in tax incentives suggest that employees must have had a very difficult time planning their participation in the ESOPs, which makes the large apparent responses to tax incentives all the more striking. The history of responsiveness makes it likely that a significant part of the recent drop in ESOP participation reflects tax changes rather than the effect of the financial crisis alone. Consistent with this interpretation, a 1998 KSFA questionnaire revealed that 82% of respondents believe purchasing stock through the ESOA does not now have any advantages. While this evidence does not prove that employees were responding to the tax changes, it is very strongly suggestive, and this would be a valuable topic for further research.
Table 4, Column (2) represents the share purchased out of employees' individual funds. The sum of columns (3) and (6) amount to 100% of total loans. These total loans are composed of company loans to employees without interest (column 4), company loans to employees with interest (column 5), and direct, interest-bearing loans from either the KSFC or the Kookmin Bank (column 6). For example, in 1998, some 36% of ESOP stocks acquired were purchased out of employees funds (either debts or savings), while 64% of total purchases were financed by total loans, of which 55% represented company loans with interest, 8% company loans without interest, and 1% bank loans with interest.
Notably, the purchased amounts of ESOP stocks appear to be related to the types of financing available to employees. Table 5 indicates the percentage of stocks available for employee ESOP purchases that were foregone by employees, or forfeit rate, as reported by the KSFC. In 1997, workers failed to purchase, on average, 35.9% of the total ESOP stocks available to them. One major determinant of this rate was clearly the availability of financing: when the company financed employee purchases, either with or without requiring interest payments, employees failed to buy 33.8% of the ESOP stocks available; when the company did not provide finance, the forfeit rate increased to 40%. There has been a decline in company financing of ESOPs. This has combined with reduced tax incentives to employees in causing the decline in the ESOP purchase rate.
4. The Productivity Performance of Korean ESOP Firms: An Econometric Analysis
In this section, we present our econometric methodology and results, with a focus on the productivity effects of employee ownership.
There is a considerable debate in the literature over whether employee ownership would be more likely to have a positive or negative effect on firm productivity. Briefly, the major theoretical arguments for a negative effect are concerns that if employees gain decision-making power they would generally: be more risk averse toward investment, as well as innovation and other activities of the firm; resist layoffs; and be more concerned with increased wages than increased profits (at least if individual wage share smaller than individual profit plus capital gains share). The major theoretical arguments for positive effect are: the benefits of goal alignment (financial incentives) between owners and workers for information sharing, effort, and innovation; reduced turnover and increased incentive for both firms and employees to develop firm specific human capital; improved incentives when there is team impactedness in production, or production cannot otherwise be well monitored; improved industrial relations, and more generally of trust; and the availability of "voice" as an alternative to "exit." (For more detailed discussions, see Smith 1994; Nuti (2000); and Jones and Kato (1993).)
Empirically, in the recent economics literature a number of studies have examined the effects of employee ownership (EO) on firm performance in OECD and transition countries. Generally, employee ownership has been found to have modest positive effects when employee participation in decision-making is also present (e.g., Blasi, Conte, and Kruse,1996). The evidence from the U.S. suggests that ESOP companies fare no worse and, in some dimensions and some circumstances, may have higher productivity than firms without ESOPs. Measured productivity is higher especially when ESOPs are combined with some provision for employee voice in relevant company decisions. (See e.g., Conte and Svejnar (1990), Jones and Kato (1995), and Smith, Cin and Vodopivec, (1997).)
Preliminary evidence has also suggested that U.S. ESOPs have tended to do better than other companies in stock market performance in the 1980s and 1990s (eg, Blair, Blasi, and Kruse, 1999), and though neither causality nor replicability have been demonstrated, the results at least indicate that ESOPs need not be bad for other shareholders.
To create the data set, the1996 and 1997 annual reports of all manufacturing firms listed on the Korean Stock Exchange in Korea were examined. While standard corporate accounting data are available for all listed firms, information on the extent of EO was provided for 371 of the 760 listed companies in 1996, and 383 of 776 listed firms in 1997; hence, approximately half of the listed firms are represented in our sample. We have no reason to believe that the decision to list the employee share in company annual reports was nonrandom.
Tables 6 and 7 provide comparisons of sample firms with and without EO, in 1996 and 1997, respectively. The indicators are industry averages of EO shares, gross value added, and the number of workers by industry. The first two columns in the tables present the number of firms with some positive level of EO shares, and those with no EO. Of 371 manufacturing firms in 1996, 331 firms have a positive level of EO shares, while 41 firms have no EO shares. In 1997, the number of firms increased to 336 and to 47, respectively.
The second two columns show the industry averages of ESOP shares, first averaging only among firms with EO, then averaging across all manufacturing firms. The average level of EO for all manufacturing firms decreased from 2.13 in 1996 to 1.77 in 1997. Again, this decrease largely reflects the Korean financial and foreign exchange market crises in 1997, suggesting that movement in EO shares would tend to be pro-cyclical under the Korean ESOPs system. In most industries, the averages of EO shares are substantially lower than those in the U.S.
The third two columns represent gross value added for firms with and without EO. In 7 out of 21 manufacturing industries all of the firms have positive levels of employee ownership. In the remaining industries, firms with ESOPs have higher average VA than those without one, except for the transportation industry; this difference is statistically significant in the Textile, Metal, Electronic Equipment, Furniture, and "Other Transportation" industries.
The last two columns indicate the number of workers in EO and non-EO companies. The number of workers in ESOP firms is smaller than in non-ESOP firms, on average, and in all manufacturing sectors except for the Foods, Garments and Fur, Printing, and Chemical industries. The null hypothesis that the mean number of workers in firms with and without and ESOP are equal can be rejected for all sectors except for the Electronic Equipment industry. Clearly, then, value added per worker tends to be higher in ESOP firms. The fall in the average number of workers from 1996 to 1997 are consistent with the impact of the 1997 financial crisis.
We separately compared additional information from firms' balance sheet data for 1996 and 1997, respectively (these tables are not reported here but are available from the authors). We found that on average firms with EO have a higher capital-labor ratio than those with no EO. We also found that firms with a positive level of EO have higher sales per head on average in all industries except Foods, Electric Machinery, and Other Transportation, in 1996; and Foods, Electronic Equipment, and Furniture & Other Manufacturing, in 1997. Finally, firms with EO shares also have higher profits per worker in 6 of the 14 manufacturing industries (excluding industries where there are no firms without EO). Comparing years, we found a dramatic fall in profitability; indeed average profits were negative in our sample in1997, reflecting the financial crisis.
For the productivity analysis, we use corporate accounting data over the 1996-97 period for manufacturing firms listed on the Korea Stock Exchange. All financial variables are weighted by corresponding industry price indices (base year=1996). Labor includes all employees. We use total fixed assets as the proxy for capital. The baseline model is:
(1) ln(VA) = a0 +a1*ln(Labor) + a2*ln(Capital) + a3* EO +
+ a4*Year97 +B*(Industry-Dummies) + u
where VA=gross value added, Labor=number of workers, Capital= total fixed assets, EO = percent of employee owned shares in total issued stock, Year97= 1 for 1997 and 0 for 1996, and Industry Dummies represents a vector of dummy variables by industry (as listed in Tables 6-9).
Table 8 shows the estimated Cobb-Douglas production function for listed manufacturing companies without considering any other ownership effects. While both production factors have positive effects on value added at the 1% significance level, there is an unusually high factor share for capital (and low factor share for labor). While the factor share of labor increased from 47.7% in 1996 to a (still-low) 55% in 1997, and the capital share decreased from 53.1% to 47.9%, these changes are not statistically significant. Industry effects are jointly significant in each regression. As seen in the third column, when the time dummy for 1997 is included in the regression, it is significantly different from zero, and indicates that the gross value added decreased in 1997 by 0.13%. Again, this most likely reflects the 1997 financial and foreign exchange market crises.
Table 9 reports Cobb-Douglas regression results, including employee-ownership shares, The estimated factor shares are not much different from those in Table 10. It is striking that despite the relatively weak incentive features of Korean ESOPs, that would suggest they may be less effective in raising productivity, the coefficient on EO shares is positive and statistically significant, at the 1% level in 1996 and at the 5% level in 1997. The point estimates imply that for listed manufacturing firms in Korea, an increase in the EO share from 2% to 3% of total issued shares would lead to an increase in output of 2.7% in 1996 and 2.6% in 1997.
These results are broadly consistent with those found for OECD countries including the U.S. (e.g. Conte and Svejnar 1991; Blasi, Conte, and Kruse1996) and Japan (Jones, and Kato 1993, 1995), despite Korea's small share ownership levels and weaker avenues for employee participation in decision-making. However, workers have much lower net wealth in Korea than in the U.S.; so EO shares in Korea, while representing a smaller fraction of the company than found in U.S. ESOP firms, can still represent a larger fraction of Korean workers' net wealth. It is possible that Korean workers in ESOP firms are made to feel like owners in other ways, of which the presence of the formal ESOP may be just a symbol. While there has been significant labor strife in Korea, many Japanese management practices have also been emulated. In any case, more detailed study of the channels of effectiveness of Korean ESOPs is clearly warranted.
Note that in this analysis, we assume that employee-ownership shares are exogenous. In Korea, most listed firms offer an ESOP; and among those that do, the size of the employee share is determined by employee decisions to participate, up to a maximum specified by law-not by a choice of the firm or in response to a company formula based on profits or other endogenous benchmarks. Thus, room for endogeneity problems in the selection of the ESOP share is much smaller than in other countries. This is fortunate, because we do not have plausible instruments available to us to account for possible endogeneity in employee choice. Nevertheless, this remains a potential caveat to our results, that we hope to rectify in future research.
As seen in Tables 8 and 9, the sum of the estimated labor share, a1, and the estimated capital share, a2, is slightly larger than unity in each of the six regressions, which may suggest increasing returns to scale. We examined whether our sample firms exhibit constant returns to scale by using a transformed Cobb-Douglas production function. Subtracting ln(Labor) from both the sides of equation (1), and adding and subtracting a2*ln(Labor) from the rhs, gives:
(2) ln(VA/Labor) = a0 +(a1+a2-1)*ln(Labor) + a2*ln(Capital/Labor) + a3* EO
+ a4*Year97 +B*Industry Dummies + u
where a1+a2-1 is a returns to scale parameter. Regression results are not reported here but are available from the authors. In 1997, the estimated coefficients for returns to scale were not significantly different from zero, supporting the null hypothesis of constant returns to scale in that year; however, in 1996 and in the two-year pooled time periods, the coefficients were significantly positive, indicating increasing returns to scale. Similar results were found whether EO shares were included in or omitted from the production function. According to the point estimates, a 10% increase in capital per worker results in around a 6% increase in productivity.
A final caveat is in order: the degree of data reliability is uncertain. If the stock manipulation of the now-bankrupt Daewoo Group is an indication, financial statements of Korean firms may have been subject to systemic manipulation, particularly to attract new debt or roll over existing debt. The lack of financial transparency was one of the key concerns of the IMF and World Bank after the 1997 Korean financial crisis. Only after the period of our data-perhaps beginning with 2000 annual reports-have Korean firms' financial statements started to conform to international best practices. However, there is no reason to believe that such manipulations varied systematically with the presence of ESOPs. If anything, the added scrutiny may have induced lesser degrees of distortion, in which case the effects of ESOPs are if anything understated. Nevertheless, until data from years from 2000 become available, conclusions on the effect of employee ownership in Korea will have to be qualified.
5. A Policy Analysis
The Korea Stock Exchange Law stated two purposes for establishing Korean ESOPs: (1) broadening employee wealth in the form of stock to mitigate income inequality; and (2) improving labor-management relations to enhance worker productivity. How well have the ESOPs lived up to these purposes? What changes might increase their ability to do so? What additional roles might ESOPs play, and to what extent might these goals be facilitated by public policy?
On the basis of the information examined thus far, six initial desirable reforms or implications for policies currently under consideration may be identified; a seventh, more speculative proposal is also identified:
1. Under Korean law, neither the ESOA nor its trustee (the KSFC) has any right to diversify its investment to benefit the workers, even if such diversification seems prudent and in the workers' interest, nor does the trustee have to be sure the investment yields a fair return. This provides one among other reasons why the ESOA in Korea is not a suitable instrument for employee pensions.
2. Before 1984, employees had the right to purchase ESOP stock through the ESOA at face value when the company went public or issued new shares. This would represent a major benefit to employees because new issues are generally sold in the market at a higher price. After 1984, however, employees could buy ESOP shares only at a (less) discounted price. Such discounts are usual when a company goes public or issues new shares.
It is widely believed that companies issue IPOs or SEOs when market prices are high; and there is evidence from the U.S. that new issues tend to underperform the market for at least five years (Loughran and Ritter, 1995). If this finding also applies to Korea, this would suggest that under the current system, employees are likely to purchase stock at a comparatively high market price. By organizing ESOA provisions in this way, employee dissatisfaction with ESOPs is thus very likely. Even if, as some evidence suggests, IPOs have historically done better in Korea than in developed markets, there is no guarantee that this would continue, and diversification of purchase dates is desirable. Moreover, because Korean ESOPs are normally established on the basis of the purchase option on newly issued shares, they generally dilute the value of existing shares; this could lead to some resistance to the expansion of ESOPs. Together, these points lead to a suggested reform: Rather than have ESOPs so closely tied to new issues, ESOP shares should as a general rule be acquired from the market on a cost averaging basis.
3. According to the current law, participants' ESOP shares must be held by the KSFC for at least seven years, or until retirement or departure from the company. But as reviewed in Section 2, participants can redeem their shares for a rather wide range of exceptions just two years after purchase. When employees sell their shares, the shares do not necessarily revert back to the company or to other employees. Thus, as the work force changes, a block of stocks will not always be in the hands of employees, which might yield instability not only in the employee share, but in management as well. Incentives for longer employee holding periods may be appropriate.
4. The US evidence strongly suggests that it is the combination of employee ownership with decision making participation that generates efficiency gains. Although a growing number of US firms have developed wide-ranging participation programs, they still constitute a minority (Gates, 1998). The econometric evidence presented in section 4 showed that even as currently constituted, Korean ESOPs have positive productivity effects. Again, to extrapolate from the international experience, these gains could likely be magnified by increasing the level of employee decision making participation. Thus, an improvement in employee participation at the workplace level would likely complement the productivity effects of ESOPs in Korea. However, few if any Korean firms have developed such participation programs. These could be encouraged more through active ESOP policy.
5. Although ESOP participants in principle could exercise their voting rights directly, they have rarely done so in practice. Voting rights are an obvious vehicle for employee participation in an ESOP firm, and reforms to encourage the use of voting rights would thus seem desirable.
6. As noted earlier, Korean ESOPs differ from US ESOPs in that loans are eventually repaid directly from the employees' own funds. Thus employees wishing to purchase shares may run up against credit constraints, and otherwise creates an obvious disincentive; this may represent another good candidate for ESOP reform.
7. More speculatively, many ESOP shares are already in the hands of a single custodian, the KSFC. It should be investigated whether some risk pooling strategies-in effect, an ESOP mutual fund operated by or for the KSFC, or at least facilitated by the centralized custodial KFSC's role-could improve Korean employees' ESOP investment performance.
Despite the decline in the incidence of ESOPs in Korea in the past few years, and their somewhat tarnished reputation, there is good reason to believe that a reformed ESOP system could play a significant role in achieving a full-and fully sustainable-recovery from the recent financial and economic crises.
In Korea, the financial crisis led to significant declines in real wages; and no doubt this has led to a discontented workforce. But shared growth, or growth with equity, has long been a hallmark of Korea's economic development (World Bank, 1993). Korea's growth rates have been almost unequaled in the world for the last four decades and, compared with most other developing countries, measured inequality has been unusually low. But for many reasons, we may anticipate that the crisis increased inequality. Moreover, without some countervailing policy measures, inequality is likely to increase with globalization itself. However, by serving to increase employees' financial wealth, a resumed growth of ESOPs may help to mitigate this trend. Indeed, without the growth of ESOPs in the U.S., ordinary workers would be sharing even less in the rapid growth of financial wealth than they have been.
The financial crisis that erupted in Korea in fall 1997 has, according to many observers, revealed the necessity of a thoroughgoing restructuring of many of Korea's chaebol. The big four, Samsung, Hyundai, LG, and Daewoo, have all been greatly affected by the crisis, as have most of the other approximately 50 significant chaebol. Altogether, as is well known the chaebol represent a very large share of employment and value added in Korea. The expansion, diversification, and technological progress of the chaebol has been the core of Korean industrial policy over the last generation. These chaebol have been provided with substantial financial and other support in exchange for their upgrading technology and branching into new sectors in accordance with government development plans (Amsden. 1989; Smith, 1997, chapter 18). Interventions have continued but in reduced and less systematic form since 1993, and some argue that half-hearted reforms have been worse than none at all (Chang, Park, and Yoo, 1998). These supports have been provided through explicit or implicit taxes paid by the public at large. But now that the Korean economy has begun to approach the world technological frontier, the role of government in industry must be reduced, and Korean companies must become profitable, each business eventually its own profit center, without dependence on implicit subsidies. Though economic conditions have improved dramatically since 1998, without reform it is hard to see how Korea can emerge with a healthy economy continuing its march toward developed country status.
It would be a social disaster for an exogenous macroeconomic shock to derail a long term successful record of shared growth. It is possible that Korea will achieve recovery of growth but at the same time to be left with a far more unequal distribution of income and wealth. Once such concentrations of wealth have occurred, it becomes very difficult to revert to a more equal income distribution. Preventing this type of outcome will probably require policy choices near the beginning of the adjustment process, not after restructuring has been largely completed. In Korea, for several years there has been a public discussion about how to participate in globalization in a manner that could preserve the best of Korean practices. This concept is known in Korea as segyehwa. Adding an ESOP dimension to restructuring efforts, tailored to Korea's legal and cultural traditions, could offer part of the solution.
ESOPs may help to reinforce Korean workers' strong sense of commitment to the cause of solidifying the national economic recovery. Workers appear to hold a willingness to make sacrifices for the national interest. However, it should be noted that in other countries, such commitments have proven vulnerable to the discovery or perception that elites are making disproportionately fewer or smaller sacrifices. Reports from Korea have suggested that many ordinary Korean workers are expecting the Kim Dae Jung regime to insist on solutions that are at least fair to workers if not always influenced in practice by union policies. An ESOP strategy can adhere to this expectation without deviating from short term macroeconomic restraints and required corporate restructuring.
First, an ESOP expansion policy would be in part a reward for what are effectively employee wage concessions. The compensation would be a share of company stock held in a voting (or at least eventually voting) trust of shares for the workers. Under the Korean system, though workers have held only limited amounts of company stock formally, they seem to have been encouraged to feel like owners, as full members of the company team. There seems to be a strong sense among Korean employees that they have made significant sacrifices in the past for the benefit of their chaebol that makes them "stakeholders," in the current parlance, if not shareholders. As a result, it is understandable that workers would anticipate compensation for wage reductions, and for any company sale, especially to a foreign firm that they did not feel confident would respect these traditions of effective capital-labor partnerships. A substantial, participatory ESOP would formalize this implicit contract of effective employee share in ownership in the Korean system. The chaebol have been resisting other restructuring initiatives (Burton, 1998), but might be more receptive to an ESOP plan that included the infusion of new capital, and provided a framework for tradeoffs of present for future employee income that preserved industrial relations stability.
Additionally, it would be worthwhile to consider a potential role for ESOP type financing to support new or expanding competitive small and medium size enterprises, which Korea clearly needs to develop more of in its restructuring program.. Broad-based stock options and other forms of employee ownership are very common among innovative start-up firms in the U.S. (Smith, 1988).
There is a major untapped source of stock for expanding the ESOP trusts, that is consistent with chaebol restructuring and sustainable financial recovery. Shares could be purchased from other corporate bodies that have cross-holdings in the chaebol group. This is consistent with making the business units financially independent. And ESOP purchases could facilitate the sale of cross-held shares as part of the restructuring process. At the same time, for those companies selling their shares in other firms' stock, the funds received would provide a much needed infusion of capital to facilitate restructuring. A careful examination of the mechanics of how this would work in practice, and its likely full impact, should be a top priority for research.
Despite significant recovery of share prices, company buy-backs of stock may well be attractive. Thus, for many chaebols, ESOPs established today would represent a solid employee investment. Unfortunately, many employees sold shares during the crisis at levels much lower than they stood during recovery. Although there are significant risks to employees that must be considered explicitly, the evidence from the U.S. suggests that the trade-off against currently lower wages is likely to look very good-on average at least-over the long term.
The immediate practical problem in implementing a strategy of corporate restructuring facilitated through expanded ESOPs is that some of the chaebols most in need of restructuring are still suffering from liquidity constraints. Outside financing would be required to make a restructuring strategy with a major role for ESOPs a success. Progress would be greatly facilitated by a new type of structural adjustment loan from the World Bank or other multilateral and perhaps bilateral sources, perhaps undertaken jointly. The international loans could be contributed to a fund providing credit for qualified chaebol to set up ESOPs provided that the companies take actions to make them more profitable and competitive in the future.
In sum, the expansion and development of employee stock ownership plans (as well as more direct employee ownership and perhaps broad-based stock option programs), combined with employee participation, could help provide for an equitable, sustainable restructuring and resumption of growth. At the same time, it is very important that ESOPs not be thought of as a panacea. Employee ownership and serious strife between management and unions have been known to coexist. The key is to recognize that conflicts will not disappear, to build in the maximum institutional supports for ongoing partnership, to draw on existing experience and expertise, and to establish and invest in commitment and trust that can be a reserve on which to draw when the inevitable disagreements emerge.
6. Conclusion.
This paper has examined employee stock ownership and participation in South Korea. First, the history and institutional characteristics of Korean ESOPs were reviewed. Then, the incidence of ESOPs across industrial sectors and over time in publicly traded companies was reported, along with sources of finance, percent of employees participating, the degree to which participating employees take advantage of opportunities to buy stock, and average stock holding periods. We found that employees do not participate either financially or in decision making to the extent that they could under the law.
A sample of publicly traded ESOPs was then used to provide econometric estimates on the effect of employee ownership on company productivity. Estimates suggested that for listed manufacturing firms in Korea, an increase in the EO share from 2% to 3% of total issued shares would lead to an increase in output of 2.6%. These results are broadly consistent with those found for OECD countries including the US, despite the small share ownership levels and weaker avenues for employee participation in decision-making. One explanation for the relatively large productivity impact of these EO shares is their substantial size in relation to the wealth of Korean workers, which is less than that of workers in other countries in which ESOP studies have been conducted, including the U.S. and Japan.
Finally, the policy analysis concluded that ESOPs are not suitable instruments for employee pensions; it is not in employee interests to purchase (all of) their shares at the time of an IPO or SEO; incentives for longer employee holding periods may be appropriate; an improvement in employee participation in decision making would complement the effects of ESOPs; and changes in repayment methods could make it more attractive for employees to purchase shares.
Table 1: Summary Statistics on the Incidence of Korean ESOPs
_________________________________________
1974 128 8 8 6.3 NA
1975 189 158 159 84.1 NA
1976 274 281 253 92.3 NA
1977 323 337 307 95.1 38.2
1978 356 380 345 96.9 47.5
1979 355 383 346 97.5 47.6
1980 352 385 346 98.3 34.1
1981 343 386 340 99.1 35.3
1982 334 384 334 100 36.2
1983 327 386 323 98.5 46.3
1984 335 403 335 99.7 51.4
1985 342 409 339 99.1 49.4
1986 355 426 351 98.9 53.5
1987 389 484 385 99 60.8
1988 502 601 498 99.2 72
1989 626 751 622 99.4 74.7
1990 669 784 666 99.6 74.4
1991 686 813 682 99.4 73.7
1992 690 833 688 99.7 72.8
1993 693 854 689 99.4 74.3
1994 697 899 695 99.7 75.4
1995 721 960 719 99.7 77.1
1996 760 962 757 99.6 76.8
1997 776 1009 773 99.6 77
(1) Numbers of firms listed on the Korean Stock Exchange.
(2) Numbers of listed and unlisted firms establishing an ESOA.
(3) Number of listed firms establishing an ESOA.
(4) Ratio of listed firms with an ESOA to all listed firms = (3)/(1) x100.
(5) Participation rate (%)
= (Number of ESOA members)/( total labor force of listed firms) x100.
Source: KSFC, "Security Finance (Quarterly),"
Table 2: Distribution of Korean ESOPs by Share of Stock Owned by Employees
Year (1) ( 2) (3) (4) (5) (6) (7) (8)
1996 286 175 117 144 71 793 2.4% 6.1%
(36.1%)* (22.1%) (14.8%) (18.2%) (9.0%) (100%)
1997 283 176 126 143 56 784 2.1% 5.4%
(36.1%) (22.4%) (16.1%) (18.2%) (7.1%) (100%)
1998 291 192 110 117 51 761 1.8% 5.1%
(38.2%) (25.2%) (14.5%) (15.4%) (6.7%) (100%)
_____________________________________________________________________
(1) Numbers of companies with less than 1% of its shares in the ESOP.
(2) Numbers of companies with 1%-3% of its shares in the ESOP.
(3) Numbers of companies with 3%-5% of its shares in the ESOP.
(4) Numbers of companies with 5%-10% of its shares in the ESOP.
(5) Numbers of companies with more than 10% of its shares in the ESOP.
(6) Total numbers of companies establishing an ESOA.
(7) ESOP shares of outstanding stocks of listed companies.
(8) ESOP shares of outstanding stocks of unlisted companies.
* Values in the parentheses are percentage of total number of firms.
Source: KSFC, "Security Finance (Quarterly)," various issues
Table 3: Distribution of Holding Periods of ESOP Shares.
Time in Years Percent of Shares Deposited
Total Listed Firms Unlisted Firms
Less than 1 16.9 14.9 20.8
1 to less than 2 23.5 21.6 27.1
2 to less than 3 18.3 21.7 11.7
3 to less than 4 20.7 23.5 15.1
4 to less than 5 8.4 7.7 9.8
5 to less than 6 2.6 2.0 3.7
6 to less than 7 4.3 4.4 3.9
7 or more 5.3 4.2 7.5
TOTALS 100 100 100
Source: KSFC
Table 4: Sources of ESOP Finance
Year (1) (2) (3) (4) (5) (6)
______________________________________________________________________________
1978 58.6 35.7 13.5 11.5 2 9.4
61% 23% 20% 3% 16%
1979 73.3 48.3 14.8 12.8 2 10.2
66% 20% 17% 3% 14%
1980 81.3 54.5 16 13.4 2.6 10.8
67% 20% 16% 3% 13%
1981 94.6 65.1 17.6 13.6 4 11.9
69% 19% 14% 4% 13%
1982 106.5 74.7 19 13.6 5.4 12.8
70% 18% 13% 5% 12%
1983 123.6 85.2 23.9 16.1 7.8 14.5
69% 19% 13% 6% 12%
1984 167.6 113 39 27.3 11.7 15.6
67% 23% 16% 7% 9%
1985 23.5 16.6 5.6 2.7 2.9 1.3
71% 24% 11% 12% 6%
1986 63.2 41.3 19.1 15.4 3.7 2.8
65% 30% 24% 6% 4%
1987 198.9 171.1 21.5 16.4 5.1 6.3
86% 11% 8% 3% 3%
1988 1109.2 583.7 456.5 215.5 241 69
53% 41% 19% 22% 6%
1989 1114.6 503.9 581.1 346.5 234.6 29.6
45% 52% 31% 21% 3%
1990 364.1 131.1 215.2 179.3 35.9 17.8
36% 59% 49% 10% 5%
1991 261.3 130.2 118.2 96.2 22 12.9
50% 45% 37% 8% 5%
1992 381 257.9 106 95.1 10.9 17.1
68% 28% 25% 3% 4%
1993 489.6 227.3 249.7 175.6 74.1 12.6
46% 51% 36% 15% 3%
1994 1107 530.6 535.9 305.2 230.7 40.5
48% 48% 28% 21% 4%
1995 974 498.7 429.3 346.8 82.5 46
51% 44% 36% 8% 5%
1996 1095.6 457.9 586.3 361 225.3 51.4
42% 54% 33% 21% 5%
1997 534.1 211.7 248.7 167.4 81.3 73.8
40% 47% 31% 15% 14%
1998 824.8 286.6 526 457.6 68.4 12.2
36% 64% 55% 8% 1%
(Units are in Billion Won)
(1) annual amounts of ESOP stock purchases.
(2) the share purchased out of employees' individual funds.
(3) total company loans
(4) company interest-free loans to employees
(5) company interest-bearing loans to employees
(6) direct, interest-bearing loans from either the KSFC or the Kookmin Bank
Note: The sum of columns (3), and (6) amount to 100% of total loans.
Note: sums may not add precisely due to round-off error
Source: KSFC, "Security Finance (Quarterly)," various issues
Table 5: Forfeit Rates on the Employee Purchase Option
Year (1) (2) (3)
1989 68.5 29.7 85.3
1990 46.0 27.9 72.8
1991 46.2 38.1 72.4
1992 59.3 50.7 69.9
1993 44.5 30.5 66.7
1994 25.4 31.0 29.0
1995 34.8 11.2 49.8
1996 22.3 12.0 39.9
1997 35.9 33.8 40.0
_____________________________________________________________
(1) Average rates of giving up the purchase option
(2) Rates when a company finances the purchase.
(3) Rates when it doesn't finance the purchase
Source: KSFC "Security Finance (Quarterly)," various issues
Table 6: Characteristics of ESOP and non-ESOP listed manufacturing firms by industry, 1996.
Industry No. of Firms Average EO share VA (Mil Won) No. of Workers
EO>0 EO=0 EO>0 EO>=0 EO>0 EO=0 EO>0 EO=0
All Mfrg 330 41 2.39 2.13 75.37 78.14 1696 2130
Foods 25 4 2.50 2.15 38.85 60.19 1635 1944
Textiles 25 3 2.15 1.92 75.81** 27.62 1713 881
Garments & Fur 12 2 0.97 0.83 19.41 14.56 763 1438
Leather 2 0 0.03 0.03 41.35 NA 1477 NA
Wood products 3 0 4.79 4.79 29.75 NA 846 NA
Pulp & Paper 19 0 1.74 1.74 21.98 NA 483 NA
Printing 1 1 3.95 1.98 22.44 4.99 865 177
Petroleum 4 0 2.85 2.85 277.8 NA 2435 NA
Chemicals 64 9 2.77 2.43 45.47 23.91 907 1026
Rubber & Plastic 9 1 0.50 0.45 88.60 32.98 2026 1007
Non-Metal 24 1 2.16 2.07 64.59 4.75 1081 216
Metal 20 4 1.67 1.39 55.50** 18.35 997 583
Fabricated Metal 11 3 2.63 2.07 11.83 1.68 2316 751
Machinery & Equip. 17 0 2.95 2.95 54.16 NA 1471 NA
Office Machinery 7 0 2.26 2.26 54.16 NA 880 NA
Electronic Equip. 41 4 1.92 1.75 162.3** 25.10 3272** 849
Medical & Precision 6 0 3.78 3.78 14.55 NA 382 NA
Electric Machinery 11 1 2.36 2.16 53.58 10.81 1236 340
Transport 20 4 3.36 2.80 14.28 55.69 4007 12647
Other Transport 3 2 8.74 5.24 290.0 53.35 8165 1687
Furniture&Other Mfg 6 2 2.59 1.94 28.11* 11.93 1303 562
--------------------------------------------------------------------------
NA means no available.
***, **, * indicates that the null hypothesis of equal means of the variable in both the types
of companies can be rejected at the 1%, 5%, and 10% level of significance, respectively.
Table 7: Characteristics of ESOP and non-ESOP listed manufacturing firms by industry, 1997.
--------------------------------------------------------------------------
Industry No. of Firms Average EO share VA (Mil Won) No. of Workers
EO>0 EO=0 EO>0 EO>=0 EO>0 EO=0 EO>0 EO=0
All Mfrg 336 47 2.02 1.77 72.11 61.78 1550 1935
Foods 25 4 1.69 1.46 39.75 44.02 1672 1814
Textiles 26 3 1.71 1.53 83.45 12.93 1448 790
Garments & Fur 12 2 0.62 0.53 4.75 13.61 630 1302
Leather 2 1 2.63 1.75 13.90 14.74 397 1444
Wood products 3 0 4.27 4.27 30.15 NA 797 NA
Pulp & Paper 20 0 1.22 1.22 15.85 NA 437 NA
Printing 1 1 2.08 1.04 33.46 7.89 880 195
Petroleum 4 0 2.24 2.24 280.9 NA 2382 NA
Chemicals 66 8 2.59 2.31 50.93 25.07 897 936
Rubber & Plastic 11 1 1.38 1.26 77.53 32.33 1655 927
Non-Metal 22 2 1.73 1.59 67.00 75.63 880 1639
Metal 20 4 1.30 1.08 31.08 10.57 824 580
Fabricated Metal 10 3 2.25 1.73 151.0 12.30 2411 709
Machinery & Equip 19 0 2.40 2.40 45.11 NA 1265 NA
Office Machinery 7 0 1.71 1.71 26.07 NA 774 NA
Electronic Equip. 40 7 1.54 1.31 152.2*** 16.46 3427** 542
Medical & Precision 6 0 2.52 2.52 17.42 NA 396 NA
Electric Machinery 12 1 1.87 1.72 48.83 11.61 1092 391
Transport 22 5 3.09 2.52 111.4 372.0 2875 10078
Other Transport 3 2 6.95 4.17 404.9 58.69 7593 1742
Furniture&Oth Mfg 5 3 2.41 1.51 22.38 23.81 1212 962
--------------------------------------------------------------------------
Table 8: Estimated Standard Cobb-Douglas Production Function, without employee ownership.
Dependent variable: ln(Value Added)
1996 1997 Pooled
Independent variables
Ln(Labor) 0.477 0.550 0.513
(0.043)*** (0.069)*** (0.040)***
Ln(Capital) 0.531 0.479 0.506
(0.034)*** (0.054)*** (0.032)***
Employee Ownership No No No
Year97 No No -0.130**
Industry Dummies Yes Yes Yes
Adj. R-square 0.901 0.780 0.839
No. of firms 368 358 726
-----------------------------------------------------------------------
Notes: Values in parenthesis are standard errors.
***, **, and * stand for 1%, 5% and 10% significance level, respectively.
Table 9: Estimated Cobb-Douglas Production Function, with employee ownership.
Dependent variable: ln(Value Added)
1996 1997 Pooled
Independent variables
Ln(Labor) 0.437*** 0.462*** 0.448***
(0.046) (0.076) (0.044)
Ln(Capital) 0.606*** 0.585*** 0.597***
(0.041) (0.065) (0.038)
Employee Ownership 0.027*** 0.026** 0.026***
(0.008) (0.013) (0.007)
Year97 No No -0.121**
Industry Dummies Yes Yes Yes
Adj. R-square 0.901 0.785 0.842
No. of firms 368 358 726
-----------------------------------------------------------------------
Notes: Values in parenthesis are standard error.
***, **, and * stand for 1%, 5% and 10% significance level, respectively.
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