Employee Stock Ownership Plans and Debt Default Risk in China: Role of Operational Efficiency and Information Transparency

The Employee Stock Ownership Plan (ESOP) has emerged as a key corporate governance tool, though its adoption in China was initially constrained by regulatory challenges and an underdeveloped securities market. While ESOPs have evolved to align with governance frameworks, concerns about excessive leverage and speculation highlight the need to assess their impact on financial stability. This study examines the impact of ESOPs on debt default risk (EDF) among Chinese-listed firms, emphasizing the mediating roles of operational efficiency and information transparency. Using panel data from the Shanghai and Shenzhen A-share markets (2014–2020) and a fixed-effects model, the findings reveal that ESOP adoption significantly reduces corporate default risk by strengthening governance mechanisms and aligning managerial incentives. ESOPs also improve operational efficiency, reflected in higher return on equity (ROE), and enhance information transparency, as indicated by increased Information Disclosure Transparency Scores (IDTS). The study expands corporate finance literature by demonstrating ESOPs’ role in mitigating default risk beyond traditional incentive structures. Practically, it highlights ESOPs as a strategic governance tool that enhances financial stability and investor confidence. Policymakers may consider regulatory support for ESOP implementation to reinforce corporate governance and financial sustainability. However, the study’s focus on Chinese-listed firms may limit generalizability. Future research should explore ESOPs in different regulatory environments and examine moderating factors such as macroeconomic conditions. Overall, this study underscores the importance of ESOPs in reducing corporate financial distress, offering valuable insights for scholars, practitioners, and policymakers.