We posit that employee ownership through defined contribution (DC) plans results in managerial entrenchment, and then test the effect of the enactment of the Pension Protection Act of 2006 on the relation between the employee ownership and stock return. Using the data over the period of 1999-2014 we find that the portfolios of firms with large employee ownership significantly underperform the market before the adoption of the Act, but their risk-adjusted returns are not negative in the post-adoption period. Also, we document that firms with large employee ownership increase their firm value measured by Tobin’s Q after the adoption of the Act. These findings suggest that the adoption of the Act has been very effective to mitigate the negative effect of managerial entrenchment by decreasing the employee ownership and reinforcing the fiduciary duty of plan trustees.

JEL classification: G34; G38; J32

Key words: Pension Protection Act of 2006; Defined contribution plan; Company stock; Managerial Entrenchment; Alpha; Tobin’s Q