When Do Employees Choose to Invest in Their Firms? An Empirical Examination of Factors Affecting Employees' Participation in Employee Stock Purchase Plans

ABSTRACT The present study examined factors predicting employee participation in employee stock purchase plans (ESPPs). Despite the plausible benefits of ESPPs for participating employees, many employees do not participate in ESPPs even when they are eligible. To shed light on this puzzle, we investigated key variables related to the plan (i.e., discount rates), the firm (i.e., stock price movements), and an external event (i.e., COVID‐19 pandemic) in relation to employees' participation in ESPPs. Using a unique proprietary dataset on employee stock purchases from 40 publicly traded companies with a total of 1,005,300 employees, we found that discount rates and past stock price increases, on their own, were not associated with higher participation. However, these relationships became significantly positive when past stock prices displayed stability rather than volatility during certain pre‐participation periods. In addition, we observed that the firms in our dataset had significantly higher ESPP participation rates during (vs. before) the pandemic. These findings offer various research and practical implications, extending the compensation and employee ownership literature that has paid little attention to the predictors of employees' ESPP participation.