Stock Pyramids, Cross-Ownership, and Dual Class Equity: The Creation and Agency Costs of Separating Control from Cash Flow Rights
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Harvard Law School; European Corporate Governance Institute
George G. Triantis
Stanford Law School
Concentrated Corporate Ownership, (R. Morck, ed.), pp. 295-315, 2000
Harvard Law and Economics Discussion Paper No. 249
This paper examines common arrangements for separating control from cash flow rights: stock pyramids, cross-ownership structures, and dual class equity structures. We describe the ways in which such arrangements enable a controlling shareholder or group to maintain a complete lock on the control of a company while holding less than a majority of the cash flow rights associated with its equity. Next, we analyze the consequences and agency costs of these arrangements. In particular, we show that they have the potential to create very large agency costscosts that are an order of magnitude larger than those associated with controlling shareholders who hold a majority of the cash flow rights in their companies. The agency costs of these structures, we suggest, are also likely to exceed the agency costs of attending highly leveraged capital structures. Finally, we put forward an agenda for research concerning structures separating control from cash flow rights.
Number of Pages in PDF File: 29
Keywords: Pyramids, dual-class, cross-ownership, cash flow nights, votes, agency costs, corporate governance, law and finance
JEL Classification: G30Accepted Paper Series
Date posted: February 1, 1999 ; Last revised: October 2, 2009
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