ESOPS - FINANCIAL PERFORMANCE AND FEDERAL-TAX INCENTIVES

Previous research has suggested a relationship between the establishme nt of employee stock ownership plans (ESOPs) and post-adoption improve ments in financial performance -presumably as a result of the alignmen t of employee and stockholder interests. I examine the role of tax inc entives on the financial performance of ESOP firms. The results indica te that ESOPs for need prior to the availability of tax incentives pro vided by the Tax Reform Act of 1986 have experienced significantly gre ater improvement in financial performance than ESOPs established after passage of the Act. The results are consistent with my hypothesis and suggest that even though ESOPs can be utilized to reduce a firm's fed eral income tax liability ESOPs may be more useful to management to re duce agency costs throughout the firm.