Over the last decades, incentive pay arrangements have become a widespread phenomenon. In the United States, it has been estimated that 38.7 million employees are concerned by such schemes, representing approximately 20% of private sector employees (National Center for Employee Ownership, 2010). In France, the number of employee stock owners has increased from 700,000 in 1998 to 2.7 millions in 2007 (French Employee Ownership Association, 2009). This increased success has been driven by a permanent support from companies to executive managers and governments (Kruse, 2002). For instance, incentive pay schemes that are usually bundled with ESPPs have a major in.uence on investment decisions.

Usually, tax-free accruals of interest and tax-deductions are given for all contributions corresponding to an allocation of incentive pays. Moreover, companies usually provide matching contributions when employees invest in ESPPs, which have been shown to increase employees. Participation (Huberman et al, 2007). While there has been a large interest in company-based plans savings be-haviors, few research articles were dedicated to the exploration of investment behaviors in ESPPs.

Engelhardt and Madrian (2004) explain that in addition to risk aversion, four main factors can in.uence the decision to participate or not in ESPPs: liquidity constraints, imperfect knowledge of the plan, asset choice, and transaction costs. Non-investors would have a lower income, a lower access to ESPPs-related information, a lower willingness to invest in company stocks, and would face higher behavioral biases such as procrastination and self-defeating behavior. According to Engelhardt and Madrian (2004), these four characteristics distinguish investors from non-investors. However, Engelhardt and Madrian (2004) do not test empirically these assumptions. To our knowl-edge, the in.uence of these factors on investors. behaviors in ESPPs has not been studied from an empirical perspective.

Moreover, the relationship between incentive pay mechanisms and ESPPs remains unclear. Among investors, two main behaviors can be identi.ed. On the one hand, some employees choose to invest an amount that is lower or equal to their incentive pay. For these employees, ESPPs investment may represent a way to increase their after tax income through deductions. On the other hand, some employees choose to invest more than their incentive pay, e.g. allocate to company stocks money that does not come from their job compensations. These latter employees make an arbitrage in favor of their company stocks within their overall wealth. Currently, there is no evidence that these factors will have the same associations with the decision to be an « active » investor, e.g. invest more than their incentive pay. For these « active » ESPPs investors, investment motivations may be di¤erent. Their willingness to become an employee owner or to save for the future may be very important in the decision process.
In this paper, we explore the association between ESPPs investment decisions and incentive pay mechanisms. Specifically, we study whether liquidity constraints, imperfect knowledge of the plan, asset choice, and transaction costs have same associations with the amount invested in ESPPs and the decision to become an « active » investor, conditional on participation. We identify characteristics associated with a higher probability of participating in ESPPs, and higher level of investment in ESPPs, conditional on participation.

We distinguish « active » investors (who invest more than their incentive pay and/or up to the threshold) from other investors. We consider that investment decisions results from a two-step decision process : employees simultaneously decide to participate in the o¤er (or not) and how much to participate. The determinants of ESPPs participation are relatively understudied, due to the lack of availability of appropriate data. Much of the literature has focused on relatively small datasets and/or US data. This paper uses an original a cross-sectional dataset describing investment decisions of 44,649 employees of a large French bank who were eligible to ESPPs investments in 2005. We .nd that several proxies describing the presence of liquidity constraint, knowledge of the plan, asset choice, and transaction costs are associated with differences in the probability of investment in ESPPs, and the conditional amounts invested. We also the presence of a significant association between the two steps of the investment decision process: investment choice (yes vs. no) and how much to invest.

The remainder of the paper is organized as follows. Section 2 reviews the relevant literature on employees.investment behaviors. Section 3 describes the methods used and section 4 reports the results obtained. Section 5 presents a discussion of our empirical results, and section 6 concludes.