Employee share ownership (EO) has gained momentum over the last decades. In Europe, instances of employees holding ownership rights in their firm have steadily risen (Richter & Schrader, 2017). The total number of employee-shareholders stands at 8 million, 94% of large European companies have adopted EO and European employees hold €433 billion in shares in their companies in 2021 (EFES, 2022). Although absolute EO levels remain relatively low in many countries, employee share ownership schemes have been fueling the interest of both academics (Poutsma *et al.*, 2003, 2012) and regulatory bodies (e.g., European Parliament, 2018).

When becoming employee-shareholders, employees obtain a dual status. They are the human capital of the company and equity investors at the same time, which may carry specific implications in terms of corporate governance. Employee-shareholders may influence corporate governance through ‘classical’ formal mechanisms. They cumulate the rights of representation, information and consultation associated with the employee status with those associated with the shareholder status (Ben Noamene, 2014). However, as Boatright argues (2004, p. 15), “*because employees are more deeply involved than shareholders in the day-to-day operations of a firm and have a much more complex set of interactions with it, their governance role is not easily codified in law and must rely more on informal mechanisms*,” i.e., implicit contracts with the firm and internal dialogue (Guery & Stevenot, 2017).<fnref n="1" /> Overall, employee-shareholders are thus well positioned to protect their dual investment (Poulain-Rehm, 2006).

Despite a general agreement on EO’s role in corporate governance, academics remain unclear on potential effects of EO. A first stream of the literature points out the positive impacts of EO on attitudinal variables such as motivation, commitment and employee satisfaction (e.g., Bayo-Moriones & Larraza-Kintana, 2009). Relatedly, increased productivity (e.g., Jones & Kato, 1995; Pendleton & Robinson, 2010), lower corporate risk (Bova, Thomas, *et al.*, 2015), reduced turnover (Aldatmaz *et al.*, 2018; Hennig *et al.*, 2023) or greater innovation capacity (e.g., Chang *et al.*, 2015) have been evidenced. Numerous studies also find out that EO creates a sense of belonging that helps employees to identify with the company, thereby reducing turnover and absenteeism (Freeman *et al.*, 2010; Oyer & Schaefer, 2005; Sengupta *et al.*, 2007). These effects create a virtuous circle, so that EO contributes to increase firm’s performance (Kang & Kim, 2019; Kim & Patel, 2017). Another strand of literature evidences a ‘dark side’ of EO (Guedri & Hollandts, 2008). EO grants residual claims to employees who may seek to maximize the fixed part of their income (for instance, wages) to the detriment of the ‘random’ part represented by performance and dividends (Toe *et al.*, 2017). It follows that EO may influence decisions in the own interest of employees –such as rises in pay– at the expense of value creation and firm development. This is confirmed by Faleye *et al.* (2006) who show that EO negatively affects market valuation, long-term investment, R&D expenses, operating risk or sales growth. Moreover, the implementation of EO plans may favor managerial entrenchment (Aubert *et al.*, 2014; Hollandts *et al.*, 2011), which may in turn benefit managers and employees to the detriment of other shareholders (Faleye *et al.*, 2006). In the light of this literature, it appears that the dual investment of employee-shareholders in a firm has controversial effects.

In this study, we focus on the effect of EO on firms’ transparency. To date, three studies investigate the impact of EO on firms’ disclosure policies. Their authors evidence a significant relationship between EO and financial disclosure practices (Bova, Dou, *et al.*, 2015), the quality of financial reporting (Adwan *et al.*, 2022) and environmental information disclosure (Kong *et al.*, 2024). No study has examined the effect of EO on corporate social disclosure (CSD) so far. In this study, we aim at filling this gap for three reasons. First, in a context where EO is growing, it is legitimate to question its consequences, particularly in terms of corporate transparency, which is crucial at both micro and macro levels. Bova *et al.* (2015) show that EO benefits the firm but also all stakeholders by increasing firms’ financial transparency. An empirical study on the effects of EO on social transparency is thus lacking. Second, the interest of financial markets and stakeholders in non-financial information is ever increasing (Benlemlih *et al.*, 2021; Dardour & Husser, 2016; Michelon & Rodrigue, 2015; Mittelbach-Hörmanseder *et al.*, 2021; Thijssens *et al.*, 2015). CSD is indeed part of the Environmental, Social and Governance (ESG) information whose disclosure is valuable to financial markets (e.g., Raimo *et al.*, 2021). More specifically, CSD is a key information to assess the social aspects of firms’ activities. It is therefore relevant to better understand firms’ incentives to disclose (or not) CSD. Finally, CSD mainly includes information related to employees. Hence, employee-shareholders are strongly concerned by social information since its public dissemination may positively or negatively affect them as employees but also as shareholders (Kent & Zunker, 2017). An investigation of CSD from the employee-shareholders’ perspective thus deserves specific attention.

Referring to agency theory, we first posit a positive relationship between EO and CSD. More specifically, employee-shareholders have an interest in demanding more CSD to check that managers do not act against their interests as employees. They can also demand more CSD to reduce information asymmetry on financial markets (Romito & Vurro, 2021) so as to improve firm value and preserve their financial interests. Then, we predict that information costs may influence the relationship between EO and CSD. According to information costs theory, corporate disclosure is costly when the information disclosed by the firm is used to its disadvantage (Darrough & Stoughton, 1990; Dye, 1985). From this economic point of view, CSD is seen as the result of a trade-off between benefits associated with CSD and potential costs incurred upon its release. We suggest that CSD may be detrimental (i.e., costly) to the firm (its employees) when likely to reveal situations of labor investment inefficiency (LII) that represent bad news for financial markets. These perspectives suggest that EO may be positively associated with CSD but that LII may interfere with this relationship.

We test those two hypotheses on a sample of European listed firms over the 2008-2018 period. CSD is a corporate social disclosure score. EO is the percentage of shares owned by non-executive employees. LII represents suboptimal levels of employment, i.e., the share of a firm’s net hiring not attributable to economic factors (Pinnuck & Lillis, 2007). Consistent with our two predictions, our fixed effects model estimations show that EO is positively associated with CSD but that LII moderates this effect. More specifically, when exceeding the level justified by economic fundamentals, the level of employment weakens the positive association between EO and CSD. In other words, CSD is promoted by employee-shareholders as long as it does not risk harming them. These results are confirmed by a series of robustness tests.

Our paper furthers the scope of the extant literature in several ways. First, our study adds to the literature on EO as it highlights for the first time the impact of EO on firms’ social disclosure. Our results show that employee-shareholders influence CSD in a way to preserve the total value of their claims. Consistent with Bova *et al.* (2015), it follows that the alignment of the interests of employees and shareholders benefits all parts of the firm by reducing information asymmetry. However, in the very specific case of LII, the ‘employment’ claim outweighs the equity-tied one. In other words, employee-shareholders seek to maximize the total value of their two claims, which may be detrimental to other shareholders (Faleye *et al.*, 2006). Our results are consistent with previous literature revealing the dark side of EO. Second, our study enriches the CSD empirical literature. The latter is indeed an over-looked research area, prior research being dominated by investigations into environmental or overall Corporate Social Responsibility (CSR) disclosure (Hutchins *et al.*, 2019). Yet employee-related disclosure is a worthwhile area to investigate as intangible assets (training, employee skills, etc.) represent an increasing share of firm value (Kent & Zunker, 2017). We contribute to filling this void by identifying a new determinant of CSD. Given the specific interests at stake (especially in terms of costs, as mentioned earlier), we underline the importance of studying the disclosure of social information separately (i.e., from the other components of CSR disclosure). Finally, we also contribute to the burgeoning literature on LII. Studies related to LII have mainly focused on financial or business strategy issues so far (e.g., Ben-Nasr & Alshwer, 2016; Habib & Hasan, 2019). We show the relevance of the LII concept in the context of corporate disclosure policy (Jiang *et al.*, 2022).

<footnote n="1">In OECD countries, ‘institutional’ systems for employee representation are created at the company level. These mechanisms form the basis for ‘social dialogue’ in which employers and employees communicate, cooperate or negotiate in multiple ways (Crifo & Ribérioux, 2019).</footnote>
# Literature review and hypotheses development

## The association between EO and CSD

According to agency theory (Jensen & Meckling, 1976), the separation between the functions of decision-making (delegated to managers by shareholders) and implementation (entrusted to employees) is problematic and *a priori* conflicting insofar as the interests of the parties are not necessarily the same, particularly between shareholders and employees. The objective of shareholders is to maximize their return on investment. On the other hand, employees seek to maximize their own utility, i.e., compensation, job security and private benefits. Firms consider EO plans as one way of providing employees with additional compensation. This supplement should help employees identify more closely with the objectives of the company and its shareholders. This is expected to reduce workplace conflicts while also increasing productivity (Crifo & Ribérioux, 2019).

To our knowledge, three studies analyze the impact of EO on corporate disclosure. Adwan *et al.* (2022) show that EO reduces the firms’ incentives to manipulate reported performance. Bova *et al.* (2015) show that EO increases the motivation of firms to voluntarily disclose information. Kong *et al.* (2024) demonstrate that the mere granting of stock ownership plans to non-executive employees is associated with greater environmental information disclosure quality. Our paper adds to this literature by analyzing the impact of EO on CSD. We focus exclusively on CSD as it refers to the social dimension of CSR disclosure, which is of particular interest to employees (Kent & Zunker, 2017).

According to Faleye *et al.* (2006), employee-shareholders may influence corporate decisions to maximize the total value of their two claims –the primarily salary-based fixed claim and the equity-based residual claim. In this study, we first assume that CSD may be used to preserve both claims. Employee-shareholders may indeed encourage CSD for two reasons. The first reason concerns the safeguarding of their interests as employees through the control of managers. In agency theory, corporate disclosure aims at reducing agency conflicts by allowing interested parties to better monitor managers. Regarding CSD, employee-shareholders may use the information disclosed (including financial reports) to ensure that managers do not act against their interests (Adwan *et al.*, 2022). For example, they may use the reported accounts to analyze the distribution of the wealth created. In this context, employee-shareholders should pay particular attention to CSD as it directly concerns their working and employment conditions. CSD is therefore key to control managers’ social decisions making since it reveals how the firm treats its employees. In a more proactive way, employee-shareholders could use CSD to put pressure on companies to improve their social performance. Indeed, publicly disclosed information allows employees (in fact, everyone) to compare the social performance of their company with those of peers. Employees can therefore use the information publicly disclosed to negotiate better working conditions or employment, especially if the comparison is against them. In other words, CSD is a tool that can strengthen the bargaining power of employee-shareholders to preserve their interests as employees or even extract new rents. These objectives explain why employee-shareholders have an incentive to demand more CSD.

The second reason relies on corporate stock market performance and shareholder’s value maximization. Employee-shareholders invest their human and financial capital in the same company. As a result, a significant and not diversified part of their wealth depends on the value of the company they work in. Compared to other shareholders, their investment is less diversified and more closely tied to the employing firm, making them particularly sensitive to the firm’s financial performance and health (Bova, Dou, *et al.*, 2015; Chen *et al.*, 2020; Richardson & Nejad, 1986). Employee-shareholders have therefore a vested interest in taking measures to improve firm value (i.e., their equity-based residual claim) and in particular encouraging CSD. Indeed, non-financial information disclosure is seen as a source of value creation (Cho *et al.*, 2020; Husser & Evraert-Bardinet, 2014). More specifically, employee-related disclosure represents an increasing proportion of company value (Kent & Zunker, 2017) and, as such, is receiving increasing attention from financial markets. Chen *et al.* (2020) add that CSD may contribute to attract and retain employees. Employee-shareholders may thus see it as another argument to push for CSD.

In summary, CSD is a way to increase the total value of employee-shareholders’ claims. First, it reduces agency problems by assuring employee-shareholders of managers acting in their best interests as employees. Second, it contributes to information asymmetry reduction on markets and therefore on subsequent increase in firms’ value. We thus form the following hypothesis:

```
Hypothesis 1: EO is positively associated with CSD.
```

## The moderating role of LII

According to the economic theory of information, firms will disclose information only if the associated benefits outweigh costs (Ness & Mirza, 1991). Over recent decades, a consensus has formed in the literature around the idea that information is not a cost-free product that companies must provide. In addition to the direct costs of information (production, audit and dissemination), corporate disclosure may be costly in the sense that the information disclosed by the firm may be used to its disadvantage (Verrecchia, 1983). In other words, information must also be considered as a potential source of risk for the firm. The disclosure of certain information can indeed generate an indirect cost that expresses the sanction of interested parties (for example, the financial markets) against the firm. In the situation where such a sanction (such a cost) is likely, managers have an incentive to keep the information they hold private. Ultimately, managers have to arbitrate between two types of externalities. Expected positive externalities such as reduction of agency costs and information asymmetry explain the increase in corporate disclosure while potential negative externalities justify the denial to disclose even favorable news. News can be favorable for one interest group but unfavorable for another one, which makes the trade-off complex.

In this study, we suggest that CSD may be costly when likely to reveal LII. LII refers to situations in which the level of employment is higher or lower than the firms’ optimal level, i.e., the level consistent with its economic fundamentals. Any deviation from the optimal level of labor investment has a negative impact on the firm’s operating performance and thus on shareholders’ wealth (Ghaly *et al.*, 2020). More precisely, over-employment causes additional costs while under-employment suggests that the firm is underutilizing the financial resources available for worthwhile projects (Khedmati *et al.*, 2020). Suboptimal corporate employment decisions are therefore a particular focus for investors, especially considering the growing importance of labor as a significant cost component of business operations in recent years (Ha & Feng, 2018). Overall, LII is thus considered bad news by the market (a cost for the firm) if revealed.

In case of LII, we argue that CSD may be costly and detrimental to employee-shareholders for two reasons. First, part of employee-shareholders’ wealth depends on the stock price of the company they work in. Any bad news on the stock market therefore affects their wealth. Second, revealing that they are at the root of one of the company’s inefficiencies could backfire and increase conflicts of interests with other stakeholders in the company. In case of LII, employee-shareholders have therefore less interest in demanding more CSD.

We argue that employee-shareholders are in a better position than other shareholders to detect potential LII. First, they cumulate shareholders’ and employees’ rights to information and consultation. Second, employee-shareholders are also more involved in day-by-day operations, which gives them another informational advantage (Chen *et al.*, 2020). In sum, various specific information channels are at their disposal (field observation through, for example, interactions with suppliers and customers, physical proximity to management, social dialogue, internal information relays) and enable them to detect LII. Aware of this informational advantage, they pay close attention to CSD and its potential counterproductive effects, such as drawing attention to potential inefficiencies. If the potential negative effects of disclosure are to outweigh the effects of greater transparency, it may therefore be wise to limit CSD. Put another way, in case of LII, employee-shareholders have less interest in extensive CSD (Holder-Webb *et al.*, 2009). We thus form the following hypothesis:

```
Hypothesis 2: LII negatively moderates the relationship between EO and
              CSD.
```
# Methodology

## Variable definitions

Our proxy variable for CSD is the social disclosure score provided by Bloomberg (*SOCIAL_DISC*). Technically, it is based on 26 social data points disclosed by the firm,<fnref n="2" /> adjusted by industry<fnref n="3" /> and weighted by importance. According to Li *et al.* (2018, p. 61), the score “*indicates the rating that Bloomberg’s analysts give to the degree of transparency and accountability of a firm’s reporting*” in a given field –social in our case. This score is of interest for several reasons for our study. First, this metric captures both the quantity and the quality (in terms of objective and industry-relevant data points) of corporate social information disclosed (Benlemlih *et al.*, 2018; Qiu *et al.*, 2016). Then, it provides a basis for comparison between companies. The Bloomberg score ranges from 0.1 for companies with minimum information available to 100 for companies disclosing extensive social information. Lagging companies thus receive lower scores compared to their leading counterparts (Guo *et al.*, 2022). Finally, Bloomberg’s scores are widely used in financial markets, which is what they are designed for.

To test H1, we use the percentage of shares owned by non-executive employees, labelled *E_O*. This measure comes from the EFES (European Federation of Employee Share ownership), a data base frequently used by academics (Adwan *et al.*, 2022; Kang & Kim, 2019; Kim & Patel, 2017; Richter & Schrader, 2017). The moderating variable used to test H2 is derived from the concept of LII (Ben-Nasr & Alshwer, 2016; Ghaly *et al.*, 2020; Jung *et al.*, 2014; Khedmati *et al.*, 2020; Pinnuck & Lillis, 2007). We first compute *NET_HIRE* as the change in the number of employees. We then derive *LAB_IN* (LII) from abnormal net hiring defined as the difference between the actual and the expected change in the firm’s net hiring. We run equation (1) below to estimate the expected net hiring, following the model of Jung *et al.* (2014):

where *i* denotes a firm and *t* denotes a year. *NET_HIRE* is the percentage change in employees, *SALES_GR* is the percentage change in sales revenue, *PROFIT*is the net income scaled by beginning of the year total assets, ∆*profit* is the change in *profit*, *RETURN* is the annual stock return, *SIZE_R* is the log of market value of equity at the beginning of the year ranked into percentiles, *QUICK* is the ratio of cash and short-term investments plus receivables on current liabilities, ∆*quick* is the change in *quick*, *DEBT* is the ratio of long-term debt to total assets at the beginning of the year, and the five *LOSS_BIN* variables are indicators for each 0.005 interval of prior year ROA from 0 to 0.025. Based on previous specifications (Ben-Nasr & Alshwer, 2016; Jung *et al.*, 2014), our model includes industry fixed effects.<fnref n="4" /> We winsorize all continuous variables at the 1<sup>st</sup> and 99<sup>th</sup> percentiles of their distributions. The estimated coefficients from (1) are then used to determine the expected level of net hiring for each firm. The *LAB_IN* variable is equal to the absolute value of the difference between the actual level of net hiring and the expected level of net hiring.

Consistent with prior literature, we include *CONTROLS*, a vector of control variables, in the main regression. We include firm-level variables: firm size (*SIZE*) and profitability (*ROA*). We also control for leverage (*LEV*) (Kent & Zunker, 2017). We control for social performance (*SOCIAL_PERF*) as human resources management practices complementing EO are likely to impact CSD (Jiang *et al.*, 2012). We control for the presence of a board sustainability committee (*com*) as a governance device fostering corporate disclosure (Orazalin, 2020). We also integrate managerial participation (*M_PART*) (Adwan *et al.*, 2022), board independence (*BOARD_INDEP*) (Muttakin *et al.*, 2018) and ownership concentration (*OWN_CONC*) (Khlif *et al.*, 2017). All continuous control variables are winsorized at the top and bottom 1% levels. Unless otherwise specified, data is retrieved from Thomson Reuters Eikon. Appendix A lists all variables and their description.

## Models

To test H1 and H2, we estimate the following model:

We expect a significant and positive β<sub>1</sub> coefficient associated with the*E_O*variable and a β<sub>3</sub> significant and negative coefficient associated with the interaction term between the*E_O*and the*LAB_IN*variables. We select a panel estimation method including fixed effects rather than random ones based on a Durbin-Wu-Hausmann specification test (statistics = 111.92, *p* < 0.000). We estimate linear equation (2) using robust Huber/White standard errors clustered at the firm level and include dummy variables for each time period.

## Sample

Our initial sample consists of all European listed companies with market capitalization over €200 million from 2008 to 2018.<fnref n="5" /> Consistent with Habib and Hasan (2019), we first identify 16,615 observations from Thomson Reuters Eikon to estimate the level of expected hiring from equation (1). Our main regression (equation 2) is then estimated on a sub-sample of 4,664 observations due to the unavailability of other variables and sufficient data requirements. To obtain reliable parameter estimates, we indeed require at least 100 observations per country. The final sample of 4,664 observations corresponds to 626 different companies.

<footnote n="2">Data is collected via multiple sources including annual and standalone sustainability reports.</footnote>

<footnote n="3">*SOCIAL_DISC* is a standardized industry-specific score implying that companies are assessed only in terms of the disclosure of information that is relevant to their activity sector (Benlemlih *et al*., 2018).</footnote>

<footnote n="4">Some studies also include year fixed effects (Khedmati *et al.*, 2020; Kong *et al.*, 2018). Doing so influences neither the sign nor the significance levels of the coefficients associated with our main independent variables of interest.</footnote>

<footnote n="5">Asset management, investment funds and real estate funds are excluded.</footnote>