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Summary of Research
on Dual Classes of Stock
Leonard Rosenthal
May 11, 2009
Dual Classes of Stock
Comprehensive Overview of
Dual Class Firms in the U.S. - Paul A. Gompers, Joy Ishii, and Andrew
Metrick “Extreme
Governance: An Analysis of Dual-Class Firms in the United States,”
forthcoming in the Review of Financial Studies – covers the period
1995 through 2002. In one set of tests, firm value is positively
associated with controlling shareholders’ economic rights and negatively
associated with controlling shareholders’ voting rights. In another set
of test, similar results but not as statistically significant.
Possible Negatives
a. Anti-takeover
mechanism – Gregg Jarrell and Annette Poulsen, “Dual-Class
Recapitalizations as Antitakeover Mechanisms: The Recent Evidence,”
Journal of Financial Economics, 1988, 129-152.
b. Way to effectively
entrench management - Stijn Claessens, Simeon Djankov, Joseph P.H. Fan,
and Larry H.P. Lang, “Disentangling the Incentive and Entrenchment Effects
of Large Shareholdings,” Journal of Finance, 2002, 2741-2772.
Paul A. Gompers, Joy
Ishii, and Andrew Metrick “Extreme
Governance: An Analysis of Dual-Class Firms in the United States,”
forthcoming in the Review of Financial Studies
c. Exploit minority
shareholders – R. J. Gilson,” “Evaluating Dual Class Common Stock: The
Relevance of Substitutes,” Virginia Law Review, 1987, 807-844.
Possible Positives
a. Still able to access
equity markets while retaining control – Harry DeAngelo and Linda DeAngelo,
“Managerial Ownership of Voting Rights,” Journal of Financial Economics,
1985, 33-69.
b. Beneficial for firms
which require firm-specific human talent; for firms where outsiders have
difficulty valuing projects vs. insiders who have much better knowledge;
for firms which provide a product/service which brings utility to those
control the votes – Harold Demsetz, Harold and Kenneth Lehn, “The
Structure of Corporate Ownership: Causes and Consequences,” Journal of
Political Economy, 1985, 1155-77.
Impact on Stock Price
and Operating Performance
a. Conflicting evidence
on stock price around announcement date of recapitalization:
Negative - Anti-takeover
mechanism – Gregg Jarrell and Annette Poulsen, “Dual-Class
Recapitalizations as Antitakeover Mechanisms: The Recent Evidence,”
Journal of Financial Economics, 1988, 129-152.
Positive – Marcia M.
Cornett and Michael R. Vetsuypens, “Voting Rights and
Shareholder Wealth:
The Issuance of Limited Voting Stock,” Managerial
and
Decision Economics,
1989, 175-188.
b. Conflicting evidence
on operating performance after implementation:
Negative – Wayne
Mikkelson and Megan Partch, “The Consequences of Unbundling Managers’
Voting Rights and Equity Claims,” Journal of Corporate Finance,
1994, 175-199.
Positive – Kenneth Lehn,
Jeffrey Netter, Annette Poulsen, “Consolidating Corporate Control:
Dual-Class Reorganizations versus Leveraged Buyouts,” Journal of
Financial Economics, 1990, 557-580.
c. Conflicting Evidence
on stock/firm performance/value
Negative – Belen
Villallonga and Amit Raphael, “How Are U.S. Family Firms Controlled?”
Review of Financial Studies, forthcoming.
Positive – Valentin
Dimitrov and Prem Jain, “Recapitalization of One Class of Common
Stock into Dual Class:
Growth and Long-Run Stock Returns,” Journal of
Corporate
Finance,
2006, 342-366.
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