Recapitalization of One Class of Common Stock into Dual-class: Growth and Long-run Stock Returns
Rutgers, The State University of New Jersey - Accounting & Information Systems
Prem C. Jain
Georgetown University - Department of Accounting and Business Law
September 1, 2004
We study a sample of 178 firms that changed from a one-share one-vote into a dual-class common stock structure during 1979-1998. We find that dual-class recapitalizations are shareholder value enhancing corporate initiatives. Using accounting data, Lehn, Netter and Poulsen (1990) provide evidence that dual-class recapitalizing firms grow faster than firms in a control group and undertake secondary equity offerings (SEOs) to finance growth. We show that growth is indeed beneficial to the shareholders. The stockholders, on average, earn significant positive abnormal returns of 23.11% in a period of four years following the announcement month. Furthermore, abnormal returns are even larger (52.61%) for the dual-class firms that issue equity. This evidence is especially supportive of the value enhancing hypothesis as it is contrary to the prevailing result that SEOs are generally followed by large negative returns. We do not find any evidence of managerial entrenchment.
Number of Pages in PDF File: 45
Keywords: Dual-class structure, Corporate governance, Long-run performance
JEL Classification: G14, G31, G32, G34working papers series
Date posted: August 2, 2003
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.531 seconds