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 Korean Journal of Financial Studies 2013;42(1):263-284. Published online February 28, 2013.
 Principal-Protected ESOP for Diversifying Employees Financial Risks Hyoung Tae Kim, Hong Sun Song, Hyo Seob Lee 근로자의 최적 위험분산을 위한 원금보장형 우리사주제도(ESOP) 설계 방안 김형태, 송홍선, 이효섭 Abstract An employee stock ownership plan (ESOP) allows employees to purchase and hold shares in the company at favorable conditions. ESOPs are popular because they offer incentives to work, and the profit from a higher stock price helps employees accumulate savings. But problems arise when the company is in danger of bankruptcy. In this case, employees can be exposed to dual risks; they may not be able to recover unpaid wages, and stock ownership will incur investment losses. In the volatile Korean stock market, the potential losses from stock price declines are pointed as the biggest obstacle to ESOPs being used more widely. As an alternative, this study proposes a "principal-protected ESOP" which spreads the dual risks and helps employees save money more stably. Based on the mean-variance expected utility model, we show that the principal-protected ESOP significantly increases utility for employees. We also present a desirable principal-protected ESOP structure that takes into account moral hazard to provide optimal utility to employees. Considering the cost increases from moral hazard because of the principal protection structure, an ESOP that has partial principal protection and distributes some investment returns to the ESOP provider (financial firm) is found to provide the highest expected utility to employees. We hope the results of this study will contribute to a more incentive- compatible ESOP system and provide fresh policy implications for Korea`s ESOP development. Key Words: 도덕적 해이,우리사주제도,원금보장,이중위험,평균-분산 기대효용,Dual Risks,Employee Stock Ownership Plan,Mean-Variance Expected Utility,Moral Hazard,Principal-Protected
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