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.     

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.     

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.     

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.     

Restricted Voting Stock, Acquisition Premiums, and the Market Value of Corporate Control

This paper examines the valuation and financial histories of 152 British firms that have two or more common share classes with differential voting rights outstanding at some time between 1955 and 1982. Over 16,000 monthly price pairs are examined, and on average, the superior voting (SV) shares market prices exceed those of the otherwise equivalent class of restricted voting (RV) shares by 13.3 percent. Liquidity factors, if anything, attenuate this result since RV shares trade much more frequently than SV shares. Forty-three of the sample companies are acquired while they have multiple share classes outstanding, and a higher price is paid for the SV share class than for the RV share class in 37 cases. The SV share price premium is found to be positively related to insider holdings of SV shares and negatively related to insider holdings of RV shares.     

A Comparative Analysis of Takeovers of Single and Dual Class Firms

This paper analyzes takeovers of dual class companies listed on the Toronto Stock Exchange over the period 1976 to 1989. It finds support for the hypothesis that despite the evidence that restricted shares sell at a discount compared to superior voting shares, takeover returns are the same for both classes of shares. Secondly, it tests the hypothesis that the classification of common equity into two classes confers differential takeover value on controlling shareholders and find that superior voting shares of dual class firms experience higher returns during takeovers than do shares of single class firms.     

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.     

Managerial ownership of voting rights: A study of public corporations with dual classes of common stock

Managers of firms with dual classes of common stock can choose different quantities of votes for a given cash flow interest by choosing different quantities of the two securities. We study managerial stock holdings in 45 dual class firms and find that vote ownership per se is an important motivation for these holdings in that corporate officers and their families hold a median 56.9% of the votes and 24.0% of the common stock cash flows. We also find significant family involvement in many sample firms, and document four case studies in which explicit acquisition premiums were paid for superior voting shares.     

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.     

RESTRICTED VOTING SHARES,OWNERSHIP STRUCTURE,AND THE MARKET VALUE OF DUAL-CLASS FIRMS

In this study, financial implications of differential voting right/multiple ordinary share class capitalizations are examined using data from British dual-class firms. Positive wealth effects are observed after announcements of plans to issue restricted voting (RV) shares, and also after announcements of RV share enfranchisement plans. The two share classes are usually created through large, noncash stock dividends or recapitalizations and, although corporate insiders hold about three times as large a fraction of superior voting (SV) shares, their RV shareholdings average a nontrivial 10.1 percent. Finally, compensation is usually paid to SV shareholders when RV shares are enfranchised.     

Large shareholder diversification,corporate risk taking,and the benefits of changing to differential voting rights

We show how the change to differential voting rights allows dominant shareholders to retain control even after selling substantial economic ownership in the firm and diversifying their wealth. This unbundling of cash flow and control rights leads to more dispersed economic ownership and a closer alignment of dominant and dispersed shareholder interests. When insiders sell sizeable amounts of their economic interests, firms increase capital expenditures, strengthen corporate focus, divest non-core operations, and generate superior industry-adjusted performance. The change to differential voting rights both fosters corporate control activity and creates higher takeover premiums that are paid equally to all shareholders.     

Large blockholders and stock price crash risk: An international study

This study examines the relationship between large blockholders and stock price crash risk across 44 countries. Based on the results, firms held by large blockholders have a lower firm-specific crash risk than widely held firms. In this case, the higher the proportion of voting rights, the lower the risk. In addition, the negative association is more pronounced in firms undertaking overinvestment activities. The findings also suggest that large shareholders serve as monitors in firms, reducing agency costs and leading to lower stock price crash risk. Meanwhile, this mitigating effect is stronger in firms held by a family, another widely held corporation, and the state. Conversely, the results show no such effect in firms held by a large institutional investor. Finally, the relationship is more pronounced in developed countries and in English common law and German civil law countries, thus highlighting the role of large blockholders as a complementary governance mechanism, rather than a substitutive one.     

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.     

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.     

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.     

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.     

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.     

Corporate Capital Structure,Agency Costs,and Ownership Control: The Case of All-Equity Firms

This paper provides evidence that all-equity firms exhibit greater levels of managerial stockholdings, more extensive family relationships among top management, and higher liquidity positions than a matched sample of levered firms. Further, top managers of all-equity firms with family involvement in corporate operations have greater control of corporate voting rights than managers of all-equity firms without family involvement. These findings are consistent with the interpretation that managerial control of voting rights and family relationships among senior managers are important factors in the decision to eliminate leverage.     

The American keiretsu and universal banks: Investing,voting and sitting on nonfinancials’ corporate boards

This paper investigates the equity investments and voting rights that American banks control through their trust business. The paper also studies whether the voting rights American banks control through their trust business help explain their presence on firms’ corporate boards. We find that on average the largest 100 American banks control 10% of the voting rights of S&P 500 firms. We also find that there are several firms in the S&P 500 index in which the top banks control more than 20% of their voting rights, and several firms in the country in which these banks control more than 60% of their voting rights. Our investigation into the presence of American bankers on corporate boards shows that bankers are more likely to join the boards of firms in which they control a large voting stake. We also find that banks’ lending relationships help explain bankers’ board memberships. Our results further show that bankers who have both a voting stake in a firm and a lending relationship with it have a higher likelihood of joining the firm's board of directors.