Dual class shares – is India ready for it?

Market evidence suggest that a class of common stock with superior voting rights trades at systematically higher prices than an identical class of stock with inferior voting rights, as control over the firm grants the promoters some opportunity to receive a higher payoff. Differential voting rights class of shares may attract a certain class of investors who are only interested in the economic benefits of a company. It assists management in deterring potential rivals from winning a control and allows raising fresh capital for growth without giving up control. The value of controlling a firm derives from the fact that you believe that you or someone else would operate the firm differently from the way it is being run currently. Differential voting rights shares in different countries have indicated that voting rights are generally worth between 10% and 20% of the value of common stock. This article intends to create awareness about differential voting rights shares, to study the international as well as domestic experience and tries to examine the various factors that affect differential voting rights share prices.     

Voting Rights and Market Reaction to Dual Class Common Stock Issues

This paper examines the return of the original class of common stock around the announcement of the creation of a second class of stock. As in previous studies, this one finds a generally ambiguous market reaction on the first public announcement. However, this paper offers new evidence that both the voting rights and the compensation for loss of voting rights are important determinants of the market's reaction. Specifically, it demonstrates that a second class stock issue that contains no compensation for the lost voting rights results in negative returns. When the original stockholders are compensated for lost voting rights, they experience positive abnormal returns.     

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.     

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.     

The creation of a class of limited voting common stock and shareholder wealth

Common stock with limited voting rights changes managerial incentives by allowing managers to separate ownership of equity from ownership of votes. This study compares managerial ownership before and after the creation of a class of limited voting common stock by 44 publicly traded firms between 1962 and 1984, and examines whether the event affects the wealth of current shareholders. There is no evidence that current shareholders are harmed by the creation of limited voting common stock.     

Takeover bids and the relative prices of shares that differ in their voting rights

The relative prices of shares that differ only in their voting rights are modelled. In our model, voting rights become valuable when a control contest is decided through takeover bids for outside votes. The study shows how the value of the voting right depends on the initial ownership distribution, the share structure, and the ability of the incumbent manager versus a rival for control. Empirical support for the model is provided using Swedish stock market data.     

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.     

An agency theory explanation of SEO underperformance: Evidence from dual-class firms

Using a sample of U.S. dual class companies, we empirically investigate the effects of the divergence between insiders’ voting and cash flow rights on market reaction to seasoned equity offerings (SEOs) and long-run stock performance following SEOs. We find that SEO announcement returns and long-run stock performance following SEOs are negatively related to measures of the divergence between insiders’ voting and cash flow rights. Our results support the view of agency theory as a plausible explanation of SEO underperformance. Misalignment of interests between insiders and outside shareholders can create managerial incentives to undertake value-destroying investments to extract private benefits, ultimately leading to a reduction in firm value.     

The Market Value of Corporate Votes: Theory and Evidence from Option Prices

This paper proposes a new method using option prices to estimate the market value of the shareholder voting rights associated with a stock. The method consists of synthesizing a nonvoting share using put‐call parity, and comparing its price to that of the underlying stock. Empirically, we find this measure of the value of voting rights to be positive and increasing in the time to expiration of synthetic stocks. The measure also increases around special shareholder meetings, periods of hedge fund activism, and M&A events. The method is likely useful in studies of corporate control and also has asset pricing implications.     

A Re-Examination of Shareholder Wealth Effects of Calls of Convertible Preferred Stock

Common stock price reactions to announcements of 67 calls of in-the-money convertible preferred stocks are examined, and a significant average abnormal return of ?1.6 percent is documented. The finding is robust to the choice of estimation period and the assumed return-generating process. Annual dividend obligations for the called preferred issues in the sample typically are greater than the dividends for the common shares into which they are converted, and announcement-period abnormal returns are negatively correlated with changes in dividends. Moreover, calls that result in dilution of voting rights appear to have greater adverse valuation effects than calls that do not alter voting rights concentration.     

Off Track: The Disappearance of Tracking Stocks

During the two decades following the first announcement of a tracking stock issue by General Motors in 1984, over 50 new tracking stocks were created. The value of a tracking stock is supposed to reflect the performance of a division or operation of a firm, but does not have a direct claim on the division's assets or income. The voting rights of the tracking stock are only for the parent corporation, with no direct voting rights for the tracked division. The claimed benefits of issuing tracking stock include the use of internal capital markets, additional disclosure of the firm's operations, reduction of agency costs, the ability to directly compensate divisional management on performance, and greater analyst following and liquidity. But the last new issue of a tracking stock took place in 2001. And few, if any, tracking stocks still trade. This study examines how and why tracking stocks have largely stopped being issued, and why so many have been dissolved either through exchanges of shares, or sales or spin‐offs of the business units with tracking stock.     

Corporate groups,dual-class shares and the value of voting rights

It is known that deviating from the one-share–one-vote principle through the issue of non-voting stock increases the value of outsiders' voting rights. We argue that the creation of a business group is another way to deviate from one-share–one-vote and we show that it produces a larger voting-share premium in holding companies. As a consequence, having both subsidiaries and non-voting stock produces a multiplier effect on the voting premium. The puzzling size of the premium in Italy was never related to the interaction of pyramiding and non-voting stock. Our empirical study confirms that the premium is larger for holding companies issuing non-voting stock than for similar operating companies without non-voting equity.     

Large controlling shareholders and stock price synchronicity

This paper examines the effect of controlling shareholders on stock price synchronicity by focusing on two salient corporate governance features in a concentrated ownership setting, namely, ultimate cash flow rights and the separation of voting and cash flow rights (i.e., excess control). Using a unique dataset of 654 French listed firms spanning 1998–2007, this study provides evidence that stock price synchronicity increases with excess control, supporting the argument that controlling shareholders tend to disclose less firm-specific information to conceal opportunistic practices. Additionally, this study shows that firms with substantial excess control are more likely to experience stock price crashes, consistent with the conjecture that controlling shareholders are more likely to hoard bad information when their control rights exceed their cash flow rights. Another important finding is that firms’ stock prices are less synchronous and less likely to crash when controlling shareholders own a large fraction of cash flow rights. This is consistent with the argument that controlling shareholders have less incentive to adopt poor disclosure policies and to accumulate bad news, since high cash flow ownership aligns their interests with those of minority investors.     

AN INVESTIGATION OF PREFERRED STOCK FINANCING BY BANK AND NONBANK FINANCIAL INSTITUTIONS

We investigate the shareholder wealth effects of announcements of preferred stock issues made by financial institutions. Fixed-rate straight preferred stock and convertible preferred stock issue announcements result in insignificant common share price responses. However, the average stock price reaction to announcements of adjustable-rate preferred stock issues is positive and significant for banking firms. Our findings suggest that banks' common shareholders react positively to adjustable-rate preferred stock issue announcements because such securities provide a relatively low-cost way of increasing the primary capital used to satisfy legal minimum capital requirements without diluting common equity voting rights.     

The influence of ownership structure,analyst following and institutional infrastructure on stock price informativeness: international evidence

Using firms from 20 non‐US countries, we investigate whether and how ownership structure, analyst following and country‐level institutions influence stock price informativeness (SPI). We find that stock price informativeness decreases with control‐ownership wedge (the detachment of voting rights from cash flows rights), and this SPI‐reducing effect of the wedge is attenuated for firms with high analyst following and in countries with strong country‐level institutions. We also find that stock price informativeness decreases with analyst following, but this SPI‐reducing effect of analyst following is attenuated in countries with strong country‐level institutions.     

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.     

The power of control: the acquisition decisions of newly public dual-class firms

Many private firms that go public opt for a dual-class share structure which gives insiders stronger voting power, at the expense of shareholder democracy. We examine how the dual-class structure influences the merger decisions of newly public firms, which have a notable appetite for acquisitions. Specifically, we compare acquisition activity, method of payment choice, and the long-run value implications of acquisitions by newly public single-class and dual-class US companies. Our results show that dual-class IPO firms make relatively more acquisitions in innovative industries and are less likely to pay with stock as compared to single-class IPO firms. The reluctance of dual-class firms to pay with stock is positively related to the wedge between the insiders’ voting rights and cash-flow rights. We also find that newly-public dual-class acquirers perform better in the long-run than newly-public single-class acquirers, mainly due to dual-class acquisitions in innovative industries. Our multivariate analysis shows that these findings hold after controlling for relevant risk factors associated with industry, deal, and firm specific characteristics. These results suggest that the dual class structure may enable newly-public firms to make better M&A decisions after going public.     

Divergence of Cash Flow and Voting Rights,Opacity, and Stock Price Crash Risk: International Evidence

This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership‐control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual‐class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.     

Does cross-listing facilitate changes in corporate ownership and control?

This paper examines whether controlling shareholders of foreign firms use a US cross-listing to facilitate changes in ownership and control. Prior to listing, about three quarters of the firms in our sample have a controlling shareholder. After listing, about half of the controlling shareholders’ voting rights decrease, with an average decrease of 24% points that differs significantly from that of the controlling shareholders of benchmark firms that do not cross-list. Large decreases in voting rights are associated with controlling shareholder characteristics, domestic market constraints, and better stock market performance and liquidity. In addition, there is control change in 22% of the firms. Controlling shareholders are more likely to sell control, and are more likely to do so to a foreign buyer, than controlling shareholders of benchmark firms. The results suggest that controlling shareholders who want to sell shares or their control stake can use a US cross-listing to decrease the cost of transferring ownership.     

Components of execution costs: evidence of asymmetric information at the Mexican Stock Exchange

Immediate execution costs for stocks trading at the auction market of the Mexican Stock Exchange (MSE) are five times higher than those for similar NYSE stocks. The source of the trading cost differential is asymmetric information. Mexican stocks are associated with a substantially larger asymmetric information component of the spread (2.76 cents per dollar) than their matched NYSE counterparts (0.28 cents). Results indicate that differences in asymmetric information are not related to stock characteristics, number and sophistication of security analysts, listing and disclosure requirements, ownership restrictions, and voting rights.