Does it pay to be employee-owned? On the performance of knowledge-intensive firms

Purpose This paper aims to examine the stock market performance of knowledge-intensive employee-owned firms. Design/methodology/approach It constructs a portfolio comprising stocks of employee-owned wealth management companies listed in the UK Employee Ownership Index. A simple equal-weighted portfolio simulation strategy with annual rebalancing is employed and returns are analysed for the period 01.2002–12.2015. Findings The employee-owned firms consistently generate significantly higher returns, averaging 13% per annum. During favourable market conditions, the returns are even more significant at 16.40% higher than the market average annual returns. The outperformance persists in single-year and five-year investment periods, full and sub-sample periods, including bullish, stable and challenging economic times and even at high transaction costs and zero dividends. This superior performance is linked to a positive feedback loop created by homogeneous knowledge-workers who are incentivised to perform better in employee-owned business setting through participative decision-making and exhibiting risk aversion skills. Practical implications Adoption of the employee ownership model of running a business can be highly rewarding within knowledge-intensive firms. This study emphasises the need for a comprehensive database of employee-owned companies, which is currently lacking in the UK. Originality/value No prior study could be found to have studied the relationship between employee-owned knowledge-intensive firms and their stock market performance.