Analysis of Public ESOP Companies Looks at Risk of Large Stock Value Losses

A new analysis by Francesco Bova, a professor of finance at the University of Toronto and a Beyster Employee Ownership Fellow, provided the first specific data on how often large public companies with ESOPs saw their stock decline by over 50%. The analysis used data on publicly-traded ESOP firms from 1999 to 2009. It compared the propensity for ESOP firms in 1999 to experience losses of greater than 50% by 2004 (a five-year period over which the market was generally expanding), with the propensity for ESOP firms in 2004 to experience losses greater than 50% by 2009 (a five-year period over which market returns were generally decreasing).

He found that when the five-year term covers a period of market expansion, the most likely number of firms that experience a large loss was zero or one out of ten firms. Conversely, when the five-year term encompassed a period of recession, the most likely number of firms that experienced a large loss is two out of ten firms. The probability of a company losing 50% or more of its value ranged from 5.6% to 22.6%, depending on the year. When a large loss occurred (i.e., a loss of greater than 50%), the median large loss for companies in that group ranged from 69% to 86%. The analysis was done for StockShield, which has created a product to allow ESOPs to protect against large losses over five- or ten-year periods.