Do non-executive employees have information? Evidence from employee stock purchase plans

Using a novel data set on employee stock purchase plans (ESPPs), we examine whether lower-level employees have information about future firm performance. We find that high ESPP purchases are associated with a lower likelihood of future adverse events (earnings restatements and earnings breaks), and a higher likelihood of favorable events (the firm becoming a takeover target). Further, firms in the top quartile of aggregate ESPP purchases outperform those in the bottom quartile by 6 to 9% in the year after purchase. The return predictability is unlikely to be driven by trading of top management or greater employee motivation. Our results have implications for firms using employees as a source of capital, role of employees in internal governance, and market effi ciency. ∗Babenko is at Arizona State University; Sen is at Hong Kong University of Science and Technology. We thank Simi Kedia (the AFA discussant), Kai Li (the discussant), Nittai Bergman (the discussant), John O’Brien, Jeff Coles, Sudipto Dasgupta, Xiaohui Gao, Michael Lemmon, Laura Lindsey, Roni Michaely, Mark Seasholes, Chester Spatt, Geoffrey Tate, David Yermack, and the participants at American Finance Association 2011 Meetings in Denver, Rothschild Caesarea Center 8th Annual Academic Conference (IDC Israel), and in seminars at Arizona State University, Carnegie Melon University, HKUST, Nanyang Technological University, National University of Singapore, New Economic School, Simon Fraser University, Singapore Management University, and University of Hong Kong for valuable comments. We are grateful to Minjeong Kang, Tao Chen, and Smita Kedia for excellent research assistance.