Managerial bonding and stock liquidity: An analysis of dual-class firms |
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Authors: | Ekkehart Boehmer Gary C Sanger Sanjay B Varshney |
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Institution: | (1) Mays Business School, Texas A&M University, 77843-4218 College Station, TX;(2) Department of Finance, Louisiana State University, 70803-6308 Baton Rouge, LA;(3) School of Management, SUNY Institute of Technology, P. O. Box 3050, 13504-3050 Utica, NY |
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Abstract: | Given the decision to create a second class of stock through a dual-class structure, we propose that management is more (less)
likely to create a liquid secondary market for both classes of shares the lower (higher) its willingness to tie its personal
wealth to firm performance. If market makers recognize this relation, they should assign a higher likelihood to trades motivated
by superior information in shares of firms that list both classes of stock and a lower likelihood for firms that list only
one class of stock pursuant to recapitalization. Additionally, they should assign a lower likelihood to trades motivated by
superior information in shares of IPOs that choose a dual-class structure and list only one class relative to IPOs that remain
single-class. Our empirical tests based on IPOS and recaps between 1985 and 1988 provide support for these propositions. |
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