The financial returns of public companies that sponsor ESOPs are substantially and significantly higher than those of comparable non-ESOP companies. The returns are systematically different even after adjusting for risk, providing evidence of a positive investor effect. The analysis of pre- and postadoption returns of ESOP-sponsoring companies suggests that the adoption of an ESOP actually reduces financial returns, signifying the presence of a relatively large negative manager effect. These findings are consistent with the idea that most ESOPs in large publicly traded companies are adopted for defensive purposes. Even though ESOP adoption lowers financial returns in large companies and has no significant effect in smaller companies, the presence of an ESOP remains a good signal to buy the sponsor's stock.