THE ROLE OF ESOPS IN TAKEOVER CONTESTS

This article examines both the shareholder wealth effects of employee stock ownership plans (ESOPs) announced by firms subject to takeover p ressure and the takeover incidence of targets with and without ESOPs. Although we do not find that defensive ESOPs significantly reduce shar eholder wealth on average, we identify two factors-the change in manag erial and employee ownership due to the ESOP and the simultaneous anno uncement of other defensive tactics-that are associated with negative stock price reactions. We find that ESOPs are strong deterrents to tak eover. ESOP targets that are acquired earn higher returns than targets without ESOPs, but the difference is not statistically significant.