Large Shareholder Diversification, Corporate Risk Taking, and the Benefits of Changing to Differential Voting Rights
Scott W. Bauguess
US Securities & Exchange Commission
Myron B. Slovin
Louisiana State University, Baton Rouge - Department of Finance; HEC Paris
Marie E. Sushka
Arizona State University
October 12, 2011
Journal of Banking and Finance, Forthcoming
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 sizable 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.
Number of Pages in PDF File: 34
Keywords: Differential voting rights, one-share-one-vote, tag-along rights
JEL Classification: G34
Date posted: November 19, 2011
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