Effect of employee stock ownership plan on a firm’s diversification decisions and performance: a study of Indian family firms

Abstract

There has been a lot of research on the effect of employee stock options given to executives on the firm’s performance and diversification decisions. However, most of this research pertains to firms outside India. We have collected data on the firms which are publicly listed in India to study this relationship. We argue that an incentive contract with higher level of ESOPs to executive directors in business groups would be associated with higher level of international diversification, but lower level of product diversification. Our results are not statistically significant for us to say anything about the relationship of ESOPs with firm’s decisions on international diversification when it comes to business groups. However, we observe that our hypothesis about the relationship of ESOPs with product diversification in business groups does not hold, because the results show that while the executives with higher ESOPs would want more product diversification, the directors in the business group would not want high product diversification.