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Agency Problems at Dual-Class Companies

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)

Cong Wang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Fei Xie

Clemson University

Journal of Finance, Forthcoming
3rd Annual Conference on Empirical Legal Studies Papers
ECGI - Finance Working Paper No. 209/2008

We use a sample of U.S. dual-class companies to examine how the divergence between insider voting rights and cash-flow rights affects managerial extraction of private benefits of control. We find that as the divergence widens at dual-class companies, corporate cash holdings are worth less to outside shareholders, CEOs receive higher levels of compensation, managers are more likely to make shareholder-value destroying acquisitions, and capital expenditures contribute less to shareholder value. These findings support the hypothesis that managers with greater control rights in excess of cash-flow rights are prone to waste corporate resources to pursue private benefits at the expense of shareholders. As such, they contribute to our understanding of why firm value is decreasing in the insider control-cash flow rights divergence.

Number of Pages in PDF File: 49

Keywords: Dual class shares, dual class stock, agency costs, conflicts of interest, voting rights and cash flow rights divergence, acquisitions, announcement effects, empire building, executive compensation, CEO compensation, value of cash holdings, capital expenditures

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Date posted: May 7, 2008 ; Last revised: July 13, 2008

Suggested Citation

Masulis, Ronald W. and Wang, Cong and Xie, Fei, Agency Problems at Dual-Class Companies. Journal of Finance, Forthcoming; 3rd Annual Conference on Empirical Legal Studies Papers; ECGI - Finance Working Paper No. 209/2008. Available at SSRN: http://ssrn.com/abstract=1080361

Contact Information

Ronald W. Masulis (Contact Author)
University of New South Wales - Australian School of Business ( email )
Sydney, NSW 2052
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
HOME PAGE: http://www.firn.org.au

Cong Wang
The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )
Shatin, N.T.
Hong Kong
(852)26961913 (Phone)
(852)26036586 (Fax)
Fei Xie
Clemson University ( email )
101 Sikes Ave
Clemson, SC 29634
United States
(864) 656-0774 (Phone)
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References:  51
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