THE EFFECT OF EMPLOYEE STOCK OWNERSHIP PROGRAM (ESOP) TO THE COST OF CAPITAL WITH QUALITY OF EARNINGS AS AN INTERVENING VARIABLE

Abstract

The current study aimed to examine the empirical evidence related to the employee stock ownership program (ESOP) towards the cost of capital of the company with the quality of earnings as mediation. ESOP is expected to align the interests of management with the owners of the company. ESOP is expected to improve the performance of agents that will be reflected in the quality of corporate profits. Companies that implement ESOP have placed employees, management, or executive, on a par with their principals. Employees will enjoy results like other shareholders, if the company has increased earnings. Thus the risk faced by the company can be minimized. Confidence of investors and creditors will guarantee their funds and it will make the cost of capital has decreased. The data in the study were obtained from the Indonesia Stock Exchange. Nineteen sample companies are implementing ESOP program during 2008 through 2014. The number of observations obtained during this period were 60 observations. This is because the period of implementation of the ESOP of each company is different. The research hypothesis testing used a test path analysis using software SmartPLS 2.0 M3. The empirical results of the study indicated that the ESOP significantly and  negatively affected the cost of capital. ESOP also positively and significantly affect discretionary accruals of the company. Earnings quality did not affect the cost of capital. Tests of the capital cost component showed  that  ESOP and earnings quality affected the cost of debt. While for the cost of equity of  ESOP is not a factor affecting. In testing of the intervening variables, earnings quality did not mediate between the effect of ESOP and the cost of capital.

Keywords: agency theory, employee stock ownership program (ESOP), earnings quality, the cost of capital