Price differences between equity classes. Corporate control,foreign ownership or liquidity?

This paper is the first comprehensive study of price differences for dual class equity at the Oslo Stock Exchange. It analyzes the relative importance of corporate control, foreign ownership restrictions and stock market liquidity for the price differences. The Norwegian market has the peculiar feature that in part of the sample period non-voting shares were trading at a premium to voting shares, i.e., what is usually termed the “voting premium” was negative. This result can be rationalized by restrictions on foreign ownership. In the later part of the period, with no regulatory restrictions on foreign ownership, the voting premium is positive, and related to corporate governance and liquidity.     

Recapitalization of one class of common stock into dual-class: Growth and long-run stock returns

We study a sample of 178 firms that changed from a one-share one-vote into a dual-class common stock structure during 1979–1998. We find that dual-class recapitalizations are shareholder value enhancing corporate initiatives. Using accounting data, Lehn et al. (1990) [Lehn, K., Netter, J., Poulsen, A., 1990. Consolidating corporate control: dual-class recapitalizations versus leveraged buyouts. Journal of Financial Economics 27, 557–580] provide evidence that dual-class recapitalizing firms grow faster than firms in a control group and undertake secondary equity offerings (SEOs) to finance growth. We show that growth is indeed beneficial to the shareholders. The stockholders, on average, earn significant positive abnormal returns of 23.11% in a period of 4 years following the announcement month. Furthermore, abnormal returns are even larger (52.61%) for the dual-class firms that issue equity. This evidence is especially supportive of the value enhancing hypothesis as it is contrary to the prevailing result that SEOs are generally followed by large negative returns. We do not find any evidence of managerial entrenchment.     

The determinants of the voting premium in Italy: The evidence from 1974 to 2003

We examine the voting premium in Italy in the period 1974 to 2003, when it ranged from 1% to 100%. At firm level, the measure of the price differential between voting and non-voting stocks cannot be fully explained without taking into account the effect of the largest shareholder’s identity. Family-controlled firms have higher voting premiums, especially when the family owns a large stake in the company’s voting equity and the founder is the firm’s CEO and/or Chairman. We explain this result by showing that families attach greater importance to control and are more prone than other types of controlling shareholders to expropriate the non-voting class of shareholders.     

The value of the corporate voting right: Evidence from Switzerland

This paper analyzes the value of voting power of Swiss firms which usually issue high-voting- rights stock, low-voting-rights stock, and non-voting stock. Two variables measuring voting- power-inequality are constructed. They are both useful in explaining the voting-rights-premia. Also, the allocation of the voting rights is analyzed. It is shown that majority shareholders hold the high-voting-rights stock.     

A theoretical analysis of the liquidity risk premium embedded in the prices of voting and non-voting stocks

Liquidity risk and corporate control considerations affect shareholders' willingness to invest in stocks and should thus be reflected in their prices. This paper derives the premium required by liquidity risk-averse agents who invest, respectively in non-voting and voting shares. It is shown that the liquidity risk premium depends upon the investor's risk aversion, the variance of his future consumption flow and the liquidation probability of each share type. Furthermore, liquidity risk premia depend upon the firm's capital structure decisions, the distribution and private valuation of voting rights by its shareholders.     

Executive compensation in firms with concentrated control: The impact of dual class structure and family management

We examine how two distinct ownership forms of concentrated control affect executive compensation. We compare executive compensation in dual class firms with that in single class companies with concentrated control. Although both samples of companies have agency problems associated with concentrated control, dual class companies have additional problems associated with controlling shareholders holding smaller equity positions. We show that family members in executive positions in dual class companies are paid significantly more than those of single class companies with concentrated control. The excess is in the form of more incentive compensation (bonuses and stock options). This finding is consistent with optimal contract theory of executive compensation in that the higher compensation is given to prevent dual class executives from taking advantage of their higher voting leverage. Our results are robust to an alternative specification of voting leverage which uses the difference between voting and cash flow rights of controlling shareholders.     

Dual-class premium,corporate governance,and the mandatory bid rule: Evidence from the Brazilian stock market

This paper conducts a systematic analysis of the determinants of the relative price difference between voting and non-voting shares, i.e., the “dual-class premium,” within the context of a mandatory bid rule. While the removal of the mandatory bid rule can increase potential gains from control, it can also weaken protection for minority shareholders. We provide evidence that the latter effect dominates by showing that the premium increases (decreases) in response to enhancement (lowering) of investor protection via regulatory alterations in the rule. The premium is lower in government-owned firms, which may be an indicator that control transfers, that allow benefits from the mandatory bid rule to accrue to minority shareholders, are less likely in government-owned firms. We also find that the premium is inversely related to an index designed to capture the firm's corporate governance practices. The results suggest that expropriations of minority shareholders are more likely at firms with poor corporate governance provisions and weak takeover rules relating to mandatory bids.     

The structure of corporate boards and private benefits of control: Evidence from the Russian stock exchange

This paper revisits the role of board size and composition in corporate governance, employing a measure of private benefits of control (PBC) as an indicator of governance problems in firms. We calculate PBC using the voting premium approach for a sample of dual class stock companies traded on the Russian stock exchange between 1998 and 2009. Using fixed-effects regressions, we find a quadratic relationship between PBC and board size, implying the optimality of medium-sized (about 11 directors) supervisory boards. This result is substantially stronger for PBC than traditional measures of corporate performance. There is also some evidence that director ownership helps to mitigate governance problems. Most remarkably, we find that non-executive/independent directors are associated with larger PBC and thus do not seem to help improve corporate governance. In contrast, regressions with accounting performance measures as dependent variables tend to suggest a positive role of these directors in corporate governance.     

Corporate ownership and the value of a vote in an emerging market

Empirical evidence suggests that the voting premium in the Korean securities market is strongly related to the structure of corporate ownership. We find that the premium attached to voting stock is positively and significantly associated with the control value of a block of shares held by minority shareholders. We also find that the premium is negatively related to both the fraction of shares that are voting shares and the market value of equity. Empirical results indicate that private benefits of control in Korea are worth about 10% of the value of equity.     

Economic Evaluation of Voting Power of Common Stock

This paper presents an economic evaluation of common stock voting rights. An index of relative voting rights inequality for different classes of stock of the same corporation is constructed and the empirical relationship between the market premium on a superior-voting stock and the voting inequality index is examined. In only three out of the 25 cases could investors have arbitraged between the two classes of stock, although in one case the arbitrage opportunity persisted for several months.     

Dual Class Stock in Russia: Explaining a Pricing Anomaly

This paper studies the determinants of the unusually high and volatile price differential between common (voting) shares and preferred (nonvoting) shares in Russia's emerging stock market. It focuses on three potential explanations for the price spread between these two classes of stock: the control contest model of the voting premium, the inferior liquidity of preferred shares, and the risk of expropriation of preferred shareholders as a class. The regression analysis, based on data from 1997 to 2005, supports the control contest explanation and the liquidity argument. The hypothesis of expropriation of preferred shareholders as a class receives limited support, and only in the early period of the Russian stock market's development. The paper addresses the issue of structural breaks in the evolution of the price differential, related to the 1998 financial crisis and to improvements in investor protection in Russia in the early 2000s. It also provides new estimates of the magnitude of the private benefits of control in Russian companies.     

The source of value of voting rights and related dividend promises

This paper examines the relative share pricing of 98 firms with two classes of common stock trading in the United States from 1984 to 1999. The firms feature common stock classes with differential voting rights and, in some cases, differential rights to dividends. The observed voting premiums are higher than those reported in previous studies of U.S. firms and are dependent on the form of dividend promise to the low-vote shareholder. The voting premium is higher in the presence of a control threat, when insiders do not hold controlling voting power, and during periods of poor firm performance.     

公司治理质量、投资者信心与股票收益

投资者信心保持和提振是一国资本市场获得持续稳定发展的基础。公司治理质量会影响外部投资者的信心吗?投资者信心影响股票收益的机理是什么?本文运用中国A股公司2006-2009年数据进行研究,结果表明,投资者信心是市场层面因素和公司层面因素共同作用的结果。公司治理质量越高,外部投资者信心越强;投资者信心变化通过投资行为形成溢价对股票回报产生影响,这种正向影响在治理质量高的公司中得到增强,在治理质量高的公司中,投资者信心越强,股票回报越大。     

Strange bedfellows? Voluntary corporate social responsibility disclosure and politics

We show a reliable association between voluntary corporate social responsibility (CSR) disclosure and company political interests, which we proxy by company employees’ contributions to political action committees and statewide voting in presidential elections. This relation is most pronounced for the contributions of Democratic employees at companies in states that vote for the Democratic presidential candidate. We also show a positive association between corporate political contributions and excess stock returns. A portfolio strategy of investing based on company size, CSR disclosure intensity and corporate political contributions produces a significant positive mean excess stock return of 4.5 per cent over 3 months following CSR disclosure.     

Corporate control rights and the long-run equity risk premium

We address the role of incomplete contracting in the equity market in a long-run growth model. Equity delivers control rights, but holding equity might lead to disutility, since the right to vote is costly to carry. We analyze voting power and its burden in a equilibrium growth model. One of our main contributions is that we test our ex ante equity premium model using data for 44 countries over the years 1989–2005. Higher capital productivity, inflation and valuation of leisure increase the ex ante equity premium, as does lower population growth.     

Price Differentials between Dual‐class Stocks: Voting Premium or Liquidity Discount?

A series of papers suggest that private benefits can explain the price differentials between stock classes carrying different voting rights. However, in Denmark the premium is negative for several firms over long periods. This indicates that in the absence of takeover contests, where the voting right becomes crucial in a transfer of corporate control, the price differential in stock classes with identical dividend rights is more likely to reflect investors’ liquidity risks. Whereas the existing literature tends to focus primarily on corporate control‐related explanations, this paper documents the impact of liquidity on price spreads between dual‐class shares.     

Credit Union Governance and Survival of the Cooperative Form

Credit unions are cooperative financial institutions that typically operate on a one-member/one-vote governance rule. This paper demonstrates that such a governance rule may enhance the survival of such organizational forms in the face of adverse incentives created by accumulated financial surpluses and identifies factors that may prompt conversion to a joint-stock form. The analysis is based on noting that current members collectively have inherited accumulated surpluses of the cooperative from past members. Older members have an incentive to extract maximum personal private benefit from that inheritance by voting to convert from a cooperative to a joint stock company, even though such an outcome may be socially suboptimal. A simple overlapping generations model is used to develop a sustainability constraint, which must be met if conversion is not to occur and examine how a one-member/one-vote governance rule contributes to the survival of the institution in a cooperative form.     

What Cost of Capital Should You Use? The Market Has an Answer

The most widely used means of estimating a company's cost of equity capital is the Capital Asset Pricing Model (CAPM). But as a growing number of academics and practitioners have suggested, use of the CAPM produces estimates that often fail to reflect the risks of the companies as perceived by current and potential investors. The authors' work, together with other research, also suggests that the cost of equity produced by the CAPM is often too high. To the extent this is so, companies are discounting investment projects at rates of return that may be leading them to pass up value‐adding opportunities. The authors advocate the use of a simple and practical alternative to the CAPM that does not use either an assumed market risk premium or a beta. It uses instead an equity premium that is implied by the current market price of a company's stock and, as such, is implicitly derived from investors' assessments of the firm's risk that are reflected in that price. More specifically, the alternative approach solves for the internal rate of return that equates the present value of expected future cash flows to the current market price. In support of this approach, studies have shown that such market‐implied measures are better predictors than CAPM‐based estimates of future stock returns, both at the individual‐firm and aggregate market levels.     

Is Financial Flexibility a Priced Factor in the Stock Market?

This paper develops a factor analysis–based measure for shifts in corporate financial flexibility (FFLEX) that can be observed from public accounting information. Companies that experience positive shifts in FFLEX are associated with higher future investment growth opportunities. We show that FFLEX is a robust determinant of future stock returns. Firms that have increased their financial flexibility are associated with lower stock returns in the subsequent period. A zero‐cost return portfolio produces a significant positive monthly premium of 0.69%, which is driven by covariance (risk). Risk inherent in the flexibility factor is not explained away by either prominent pricing characteristics or factors.     

Empirical Evidence of the Existence of Investable Premiums in Emerging Market Investable Stocks

This paper shows that portfolios of more investable securities bear a premium when compared to portfolios of less investable stocks, reflecting compensation for local risk factors. The investable premium is overwhelmingly priced across 3,782 companies traded in 29 emerging markets from 1988 to 2006. The investable premium impacts stock returns at least as much as other fundamental premiums such as size, value, momentum, and loads on political, economic, and financial risk factors. The impact of the investable premium on emerging stocks returns has increased in strength, implying that foreign ownership has greater influence on local markets in recent years.