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Employee_stock_ownership_and_participati.pdf
1. Employee Stock Ownership and Participation in South Korea:
Incidence, Productivity Effects, and Prospects
Beom-cheol Cin* and Stephen C. Smith**
December, 1999
Abstract
This paper examines employee stock ownership and participation in South Korea. First,
the history and institutional characteristics of Korean ESOPs are reviewed. Then, the incidence
of ESOPs across industrial sectors and over time in publicly traded companies is 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
find 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 is used to provide econometric
estimates on the effect of employee ownership on company productivity. Estimates suggest 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. The policy analysis
concludes that ESOPs as designed in Korea are not suitable instruments for employee pensions;
that it is not in employee interests to purchase (all of) their shares at the time of an IPO or SEO;
that incentives for longer employee holding periods may be appropriate; that an improvement in
employee participation in decision making would complement the effects of ESOPs; and that
changes in repayment methods could make it more attractive for employees to purchase shares.
*Kyonggi University and **George Washington University. Address correspondence to: Stephen
C. Smith, The George Washington University, Department of Economics, 624 Funger Hall, 2201
G St. NW, Washington, D.C. 20052, (e-mail) scsmith@gwu.edu.
2. 2
I. Introduction
This paper examines employee stock ownership and participation in South Korea. We
describe the institutional history of Korean ESOPs and report on their incidence and 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. We find that employees do not participate either financially or
in decision making to 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 draw general conclusions and present an analysis of Korean ESOP
policies in which several suggested reforms are introduced. In particular, we conclude (1) that
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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 is
discussed.
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, the Yoo-Han-Yang-Hang Corporation (one of
the major pharmaceutical manufacturers) provided top 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
4. 4
option premium) to purchase 10% of newly issued common stock. This law was first 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 the 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 (privately 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.
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
5. 5
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 the ESOP institutions were considered to not be working very 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
6. 6
except the board of directors, 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, large stockholders are excluded, meaning that members of the ESOA must
fall under the category of minority stockholders, traditionally having less than 5% of outstanding
stocks, though this was reduced to 1% or 3% in the Business Law as revised in Dec. 1998).
ESOP participants enjoy full rights and responsibilities as minority shareholders. 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
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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 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.
Employee shareholders (like other minority stockholders) who hold more than 5% of the
company’s outstanding stock receive certain special rights such as cumulative voting rights on
selecting board of directors, security-holders’ proposals, and the right to convene a shareholders’
general meeting. (Note that the 5% threshold was reduced to 1% or 3% in Dec. 1998 when the
Business Law was revised, so there is at least some chance that this provision may become
relevant at least in small companies with substantial ESOPs.)
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
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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 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. 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
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1997, when nearly one million employees participated in ESOP programs in publicly traded
companies.
Despite these long-term trends, Korean ESOPs are currently in at least short-term decline.
In Table 2, we consider 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. Almost certainly, one factor is Korea's 1997 financial crisis. 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, the abolition of tax
incentives in 1996 almost certainly has had some effect. A 1998 KSFA questionnaire revealed
that 82% of respondents believe purchasing stock through the ESOA does not have any
advantages.
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 in
Table 3 suggests that this has been ineffective in practice. As indicated by the Table, nearly 58%
of all ESOP shares had been held for less than 3 years, while some three quarters had been held
10. 10
for 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. This is an obvious candidate for ESOP 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. 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
11. 11
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.
Importantly, 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. However, the decline in the ESOP purchase rate is probably also related to the reduced
tax incentives to employees.
Korean ESOPs can be described as a variant of US stock purchase plans combined with
thrift and savings plans. Unlike US stock purchase plans, Korean ESOPs are required to own
stock in their own companies. The Korean ESOPs have been rarely used as a stock-bonus plan, a
profit-sharing plan or a revenue-sharing plan. A company can make contributions to employees
in cash or stock (but is not required to do so); and financial institutions can make loans to
employees by using the ESOP stock as collateral. The funds contributed by the company and the
loans made by financial institutions should, by law, be used for purchasing stock in the
employees' own companies. In cases in which “extra funds” are available after the purchase of
employee shares, these must be invested in assets other than stock or real estate.
However, in practice, companies have made few contributions other than to offer the
12. 12
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. (The repayment must
normally be completed within at most 5 years).
4. The Productivity Performance of Korean ESOP Firms: An Econometric Analysis
In this section, we present our econometric methodology and results. 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 (Conte and
Svejnar, 1990). Preliminary evidence has also suggested that 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 it should be stressed that neither causality nor replicability have been
demonstrated, the results at least indicate that ESOPs need not be bad for other shareholders.
We have available standard corporate accounting data for manufacturing firms listed the
Korean Stock Exchange for two years, 1996 and 1997. This data provides information on 371 of
the 760 listed companies in 1996, and 383 firms of 776 listed firms in 1997; hence,
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approximately half of the listed firms are represented in our sample.
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. This decrease 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
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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.
Tables 8 and 9 provide information from firms' balance sheet data for 1996 and 1997,
respectively. The data in the tables indicate that most firms with EO have a higher
capital-labor ratio than those with no EO. These tables also show basic firm performance
indicators such as sales per head and net profits per worker. 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. 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).
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 otherwise, and
Industry Dummies represents a vector of dummy variables by industry (as listed in Tables 6-9).
Table 10 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
15. 15
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. As seen in the third column,
when the time dummy for 1997 is included in the regression, it is significantly different from
zero, which indicates that the gross value added decreased in 1997 by 0.13%. This most likely
reflects the 1997 financial and foreign exchange market crises.
Table 11 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 weaker incentive features of Korean ESOPs U.S. 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. (Conte
and Svejnar, 1991; Blasi, Conte, and Kruse,1996) and Japan (Jones, and Kato, 1995), despite
Korea’s small share ownership levels and weaker avenues for employee participation in decision-
making. 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. In any case, more detailed
study of Korean ESOPs is clearly warranted.
As seen in Tables 10 and 11, 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 can examine whether our sample firms exhibit constant returns to
16. 16
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.
Tables 12 and 13 report OLS estimates of equation (2). In 1997, the estimated
coefficients for returns to scale are not significantly different from zero, supporting the null
hypothesis of constant returns to scale in this period, whereas in 1996 and in the two-year pooled
time periods, the coefficients are significantly positive, indicating increasing returns to scale.
Similar results are found when EO shares are included in the Cobb-Douglas production function.
Table 13 also reports estimated coefficients of the capital-labor ratio and EO shares. For
all cases, capital per worker is positively related to labor productivity measured by value added
per worker. According to the point estimates, a 10% increase in capital per worker results in
around a 6% increase in productivity. An increase in EO shares also leads to an increase in labor
productivity in all cases: consistent with earlier results, an increase in the industry average level
of EO shares from about 2% to 3% is associated with an increase in output of about 2.6%.
5. Conclusion: 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
17. 17
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 understood that companies issue IPOs or SEOs when market prices are high;
and there is evidence that new issues tend to underperform the market for at least five years
(Loughran and Ritter, 1995). This suggests 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. 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
18. 18
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, as the firm contributes to the ESOP fund.
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 purchases. 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,
19. 19
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
20. 20
increase employees’ financial wealth, a resumed growth of ESOPs may help to mitigate this
trend. Indeed, without the growth of ESOPs in the US, 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 the economy. The expansion,
diversification, and technological progress of the chaebol has been the core of Korean industrial
policy over the last generation and the envy of much of the developing world. 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
21. 21
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. The 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
22. 22
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. 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
23. 23
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 stand in late 1999. 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
24. 24
expertise, and to establish and invest in commitment and trust that can be a reserve on which to
draw when the inevitable disagreements emerge.
25. 25
Table 1: Summary Statistics on the Incidence of Korean ESOPs
Year (1) (2) (3) (4) (5)
_________________________________________
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),"
26. 26
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
28. 28
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," 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
29. 29
Table 6: Characteristics of positive EO share firms and zero EO share manufacturing firms
listed in the KSE by industry in 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.
30. 30
Table 7: Characteristics of positive EO share firms and zero EO share firms
listed in the KSE in 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
--------------------------------------------------------------------------
31. 31
Table 8: Characteristics of firms with positive versus zero EO by industry, 1996.
----------------------------------------------------------------------------------------------------------------
Industry Capital per worker Sales per Worker Profits per worker
(Thousand) (1000 Won) (1000 Won) FO share (%)
EO>0 EO=0 EO>0 EO=0 EO>0 EO=0 EO>0 EO=0
All Mfrg 1 52.9*** 127.9 231.0*** 178.2 2.96 1.37 5.12 6.02
Foods 114.9 137.5 194.8* 313.6 1.31 9.14 5.24 6.28
Textiles 186.7 105.6 213.3 202.7 -1.43 -25.6 4.27 3.82
Wearings & Fur 77.7 40.1 236.8*** 84.7 4.52 3.02 3.24 20.6
Leather 135.4 NA 214.1 NA 1.35 NA 0.65 NA
Wood products 97.5 NA 189.1 NA 8.28 NA 0.02 NA
Pulp & Paper 215.3 NA 230.1 NA -4.88 NA 4.08 NA
Printing 88.3 88.0 293.3 162.7 8.96 7.64 20.0 3.04
Petroleum 658.8 NA 1370 NA 25.3 NA 18.08 NA
Chemicals 156.7 125.1 206.5* 161.4 7.14 5.65 4.90 9.40
Rubber & Plastic 141.4 86.1 174.9 117.7 -8.27 15.35 3.71 17.03
Non-Metal 239.9 130.6 219.8 219.0 1.87 0.97 7.21 0.00
Metal 196.3* 101.2 437.5 231.9 3.27 8.92 4.76 1.22
Fabricated Metal 139.5 53.7 186.6 112.7 1.95 2.53 5.11 1.24
Machinery & Equip 88.3 NA 195.7 NA 3.00 NA 3.16 NA
Office Machinery 112.4 NA 261.1 NA 9.76 NA 8.97 NA
Electronic Equip. 121.9 79.2 189.8 129.5 2.21 -5.94 6.55 3.78
Medical & Precision 100.2 NA 180.9 NA 19.0 NA 5.99 NA
Electric Machinery 110.7 102.4 205.3 210.3 6.37 1.90 4.15 0.56
Transport 101.7 104.1 166.5 189.8 1.02 -1.56 3.77 0.00
Other Transport 198.9 129.6 197.3 152.1 -10.6 0.08 3.25 4.54
Furniture&Oth Mfg 61.3 58.4 162.9 132.1 -2.44 0.14 2.95 3.24
--------------------------------------------------------------------------
32. 32
Table 9 Characteristics of firms with positive versus zero EO by industry, 1997.
---------------------------------------------------------------------------------------------------------------
Industry Capital per worker Sales per Worker Profits per worker
(Thousand) (1000 Won) (1000 Won) FO share (%)
EO>0 EO=0 EO>0 EO=0 EO>0 EO=0 EO>0 EO=0
All Mfrg 190.8*** 127.9 277.6*** 215.2 -4.67 -19.67 5.11 5.82
Foods 146.1 147.9 237.5 270.3 -23.6 -3.53 7.67 5.22
Textiles 257.7 131.4 278.9 261.9 2.41 -207.1 3.84 1.64
Wearings & Fur 79.1 42.6 293.2*** 100.6 -18.1 3.89 1.20*** 14.3
Leather 70.4 236.3 339.6 314.4 7.53 -28.3 0.00 3.90
Wood products 95.3 NA 210.9 NA 11.4 NA 1.57 NA
Pulp & Paper 260.1 NA 296.6 NA -18.1 NA 6.48 NA
Printing 104.1 105.5 331.2 199.5 9.32 11.3 26.6 2.12
Petroleum 687.4 NA 1738.6 NA 7.35 NA 19.23 NA
Chemicals 187.7 165.4 243.7 199.7 6.73* 2.04 4.42 14.3
Rubber & Plastic 146.3 79.7 199.8 128.9 0.96 16.84 2.89 9.59
Non-Metal 314.6 124.7 269.6 165.1 2.93 4.82 4.67 9.46
Metal 280.1*** 105.8 511.4 251.6 -34.7 -7.04 4.06*** 0.15
Fabricated Metal 163.9 75.6 189.6 120.9 -5.3 -3.41 3.85* 0.21
Machinery & Equip 108.9 NA 233.8 NA 1.43 NA 4.51 NA
Office Machinery 137.8 NA 311.0 NA -15.5 NA 6.76 NA
Electronic Equip. 169.4 141.6 217.0 265.9 -3.36 -16.4 6.18 3.44
Medical&Precision 143.3 NA 218.5 NA 23.08 NA 10.89 NA
Electric Machinery 142.2 99.5 240.3 197.3 4.28 0.56 8.92 0.25
Transport 122.6 113.8 201.6 179.9 -9.21 -8.75 2.33* 7.35
Other Transport 234.6 170.3 254.7 177.3 0.43 -11.75 5.08 5.30
Furniture&Oth Mfg 81.0 99.0 204.3 265.1 -18.86 -34.31 1.71 0.24
--------------------------------------------------------------------------
33. 33
Table 10: 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 11: 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.
34. 34
Table 12: Estimated Cobb-Douglas Production Function Excluding EO. Dependent variable:
ln(Value Added/Labor)
-----------------------------------------------------------------------
1996 1997 Pooled
Independent variables
Ln(Labor) 0.045** 0.048 0.047***
(0.020) (0.033) (0.019)
Ln(Capital/Labor) 0.613*** 0.592*** 0.604***
(0.041) (0.065) (0.038)
Employee Ownership No No No
Year97 No No -0.146***
Industry Dummies Yes Yes Yes
Adj. R-square 0.449 0.261 0.340
No. of firms 368 358 726
-----------------------------------------------------------------------
Notes: Values in parenthesis are standard errors.
***, **, and * stand for 1%, 5% and 10% significance level, respectively.
Table 13: Estimated Cobb-Douglas Production Function, Including EO, Dependent variable:
ln(Value Added/Labor)
-----------------------------------------------------------------------
1996 1997 Pooled
Independent variables
Ln(Labor) 0.018 0.045 0.036**
(0.021) (0.034) (0.020)
Ln(Capital/Labor) 0.599*** 0.585*** 0.595***
(0.040) (0.065) (0.038)
Employee Ownership 0.026*** 0.026** 0.026***
(0.008) (0.013) (0.007)
Year97 No No -0.137***
Industry Dummies Yes Yes Yes
Adj. R-square 0.479 0.266 0.352
No. of firms 368 358 726
-----------------------------------------------------------------------
Notes: Values in parenthesis are standard error.
***, **, and * stand for 1%, 5% and 10% significance level, respectively.
35. 35
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