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)
The Chinese University of Hong Kong (CUHK) - Department of Finance
University of Delaware
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
Date posted: May 7, 2008 ; Last revised: July 13, 2008
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