Employee stock ownership plan as a measure of covering up corporate fraud: Evidence from China

Although companies typically claim to implement an employee stock ownership plan (ESOP) for the purpose of incentivizing employees to enhance corporate performance, many non-incentive motives may be hidden behind this move. Using data on China's stock market from 2014 to 2022, this paper demonstrates that due to optimistic market reactions, employee stock ownership plans may be related to covering up corporate fraud. Companies that have already committed fraud but have yet to have this fraud detected have a higher propensity for declaring an ESOP. In further research, we found this effect is more pronounced for companies with underperforming stock prices.