Management commitment to innovation and esop stock concentration

The separation of ownership and control can lead to managerial entrenchment and a convergence of decision making and decision control. Decision-making refers to management's authority to make strategic and operating decisions while decision control refers to the ratification and monitoring of management decisions. Managers that possess decision control may behave in a risk-reducing manner relative to the behavior of owner managers because of management's desire to maximize job security (Amihud and Lev 1981; McEachern 1975). For example, the managers of such firms may choose to diversify the firm into a wide variety of industries in an attempt to smooth revenues and earnings and avoid a series of peaks and valleys in the company's financial performance. These managers may believe that stable earnings will be viewed positively by shareholders and should help lessen the risk of stockholder action to replace upper-level management. Managers that possess both decision-making and decision-control capabilities may pursue a variety of risk-reducing strategies in addition to broad diversification. The existence of large outside investors has been shown to result in management becoming less risk-averse; management is more willing to adopt a wide range of strategies that present greater risk, but offer greater returns to shareholders. Hill and Snell (1988) found a significant, positive correlation between stock concentration and R&D intensity, indicating that large outside beneficial owners or dominant stockholders can influence management to pursue higher risk-higher return strategies. R&D intensity is used as a proxy for innovation and is generally operationalized as a firm's industry-adjusted R&D expenditures as a percentage of its sales. Findings of other studies also suggest that large investors are associated with decreased risk aversion by management. When controlling for the effects of time, previous R&D spending, liquidity, market share, diversification, market concentration, industry, and leverage, Hansen and Hill (1992) found a mild positive correlation between institutional stock concentration and R&D spending. This paper examines management's ability to utilize employee stock ownership plans (ESOPs) to facilitate managerial decision control or the capability to ratify and monitor decisions and subsequently adopt greater risk-reducing behavior. It is possible that management may adopt an ESOP to enhance entrenchment by placing a large block of the company