Ilona Babenko and Rik Sen
Money Left on the Table: An Analysis of Participation in Employee Stock Purchase Plans
Review of Financial Studies | Volume 27, Issue 12 (Dec 2014), 3658-3698

Are individuals good at making investment choices? In academia, this question has been debated in a number of different contexts, such as participation in the equity market and saving for retirement.

However, because a wide variety of unobserved factors (e.g., individual risk aversion) can determine the optimal choices of individuals in these contexts, it is often difficult to find definitive evidence of suboptimal behavior. Additionally, the interpretation of evidence often depends on the specification of the presumed rational behavior, on which opinions may vary.

We avoid these issues by analyzing a unique setting provided by employee stock purchase plans (ESPPs) and empirically analyze a fundamental prediction of economic theory - that individuals should always take up an investment opportunity with substantial positive profits and zero risk.

What are employee stock purchase plans?

In essence, ESPPs are company-run programs that allow participating employees to buy company stock at a discount. In most plans, employees contribute through payroll deductions over a purchase period of several months. On the purchase date, the company uses the accumulated funds to buy shares at a discounted price. The discount is typically set at the 15% of the prevailing market price. Most ESPPs, however, have a feature called lookback, which sets the pre-discount purchase price to the lower of the market price at the time of the purchase and the price at the beginning of the purchase period. The lookback increases substantially the potential benefit of ESPP participation. A unique interesting feature of ESPP plans is that they often allow participating employees to sell the stock immediately after purchasing it, and our analysis focuses only on such plans. This gives employees an opportunity to secure a substantial profit without taking any downside risk - they can buy stock at a discount from the market price and sell it immediately at the market price.

ESPP participation rates are low and employees leave a lot of money on the table

Most employees fail to take advantage of the money-making opportunity provided by ESPPs. In our sample of large publicly traded U.S. firms (S&P 500, Midcap 400, and Nasdaq 100), the average participation rate is below 31%. The distribution of participation rates in Figure 1 reveals that they are lower than 80% for almost all firms, and are less than 10% for quite a few firms.

1: Distribution of ESPP participation rates across firm-years
ESPP participation rates are less than 80% for almost all firms and less than 10% for quite a few firms.

Employees who do not participate in the plan leave a considerable amount of money on the table, forgoing, on average, $3,446 each year. Even after we account for transaction costs, taxes, and the possibility of employee separation from the firm, the average employee loss is still equivalent to an annual salary increase of $3,079, which is approximately 2.8 weeks of pay. These numbers translate to aggregate employee losses of over $7 billion per year across the 239 firms in our sample. If we make an additional extreme assumption that all employees are liquidity constrained and would need to borrow on their credit cards at a 14% interest rate in order to participate in an ESPP, we still find that an average non-participating employee forfeits a value of $2,877.

What factors are related to participation in ESPP?

We use data at two levels of aggregation to analyze employee participation decisions. The first data set has firm-level data on employee stock purchase plans obtained from SEC filings during 1998-2009. ESPP participation is defined as the contributions to the ESPP per employee normalized by the maximum allowed contribution. The second data set comes from a survey and has detailed information about individual employees, including their salaries, wealth, investments in the equity market, 401(k) plans, and whether an employee ever participated in a company ESPP.

We first analyze factors that should matter if employees strictly maximize their wealth, have the ability to understand multiple options, possess perfect self-control, and choose rationally. In particular, we consider plan attractiveness, the opportunity costs of time, and employee liquidity constraints. We then move on to factors that can be important if employees have limits to processing information. In this context, we consider awareness of the plan, familiarity with trading stocks, financial literacy, trust, loyalty, and past individual experiences in the stock market.

Overall, the participation rates tend to be higher in firms with more generous plans (Table 1). A 1% increase in the discount offered by the plan leads to an increase in participation of 0.8%. The corresponding effect for value of the lookback option is smaller at 0.3%. This can be explained by preference of employees for sure gains over risky gambles or by the failure to estimate the value of the lookback option. ESPP participation also increases with time passage since the plan adoption, suggesting that employee awareness of the plan is important for participation. Employees of financial firms are likely to have a higher level of financial literacy and should understand better the benefits of participating in an ESPP. Participation rate is indeed 8.2% higher for employees in financial firms. We also find an effect of employee loyalty. Firms that are rated as one of the top 100 companies by the Great Place to Work Institute see a 12.9% higher participation in their ESPPs.

1: Employee Participation in an ESPP (Firm Level Data)
Survey salary 0.22 0.18
Years since adoption 0.58 0.63
Finance industry 8.20
100 best company 12.9
Discount value 79.6 75.9
Lookback value 34.3 36.5
Observations 2,059 2,059
The dependent variable is ESPP participation at the firm level.

Using the individual-level data, we find that participation is higher among people with higher salaries (Table 2). This can be explained by higher dollar benefits from participation (the contribution limit goes up with salary) or by lower liquidity constraints. The evidence also points to the importance of familiarity in dealing with stocks. For example, people who have experience trading other securities and those who report having ever received stock options are more likely to participate in an ESPP. These results can be interpreted as evidence that there are fixed costs associated with ESPP participation, such as figuring out plan details and tax treatment and opening a brokerage account, that can affect the decision to participate in an ESPP. We expect these learning-related costs to be higher for individuals with a lower level of education. Indeed, we find that education attenuates the relation between familiarity in dealing with stocks and ESPP participation.

2: ESPP Participation and Employee Characteristics (Individual Level Data)
BA degree 0.27 0.38
Log(salary) 0.23 0.22
Ever received stock options 0.82 0.82
Trade other securities 0.46 0.30
Positive stock return experience 0.27 0.45
BA degree*Trade other securities –0.21
BA degree*Positive stock return experience –0.27
Observations 7,453 7,453
The dependent variable is equal to 1 if an employee ever participated in the firm's ESPP. The model is estimated by probit with firm fixed effects and country fixed effects.

The results also underscore the importance of education and financial literacy for making participation decisions. For example, individuals with a bachelor's degree are 4% more likely to participate in the plan. Similarly, people who make mistakes in the valuation of their stock options are more likely to miss out on ESPP benefits. Participation is also related to the experience of the individual with the company stock. A one standard deviation increase in annual stock return over the course of an employee's tenure increases the probability of participation in an ESPP by 4.8%. For a rational individual, past returns should not matter for participation, because they are not reliable predictors of future returns and because the stock obtained through an ESPP can be sold immediately. We expect that more educated individuals are more likely to understand this irrelevance. In our RFS paper, we do find that the effect of past stock returns is significantly stronger for individuals without a bachelor's degree.


The majority of employees in large public U.S. firms do not take advantage of the riskless and profitable investment opportunities provided by employee stock purchase plans. Individual losses associated with this behavior are non-trivial, with the average employee forfeiting $3,079 per year by not signing up for the plan.

Non-participation is at least partially attributable to employee financial illiteracy and lack of familiarity in dealing with stocks. Employees who fail to take advantage of riskless investment through an ESPP are also less likely to enroll in a 401(k) plan or to participate in the broader equity market. Although ESPPs allow employees to sell the company stock immediately after purchasing it, over 45% of individuals never sell the stock over their tenure and maintain highly undiversified portfolios. These findings suggest that individuals are making mistakes that substantially affects their welfare.