Private Benefits and Minority Shareholder Expropriation (or What Exactly are Private Benefits of Control?)

Abstract:     
Our study examines the existence and the nature of private benefits of control. We do this by analyzing a well-understood phenomenon - initial public offerings of founding-family owned firms in Germany. Our sample includes a unique data set of 105 IPOs of family-owned firms floated from 1970 to 1991 on German stock exchanges. We focus on three research questions. First, we show that there exist substantial private benefits of control in these firms and - to our understanding for the first time - we empirically measure what the nature of these private benefits really is. Second, we verify that the separation of cash flow rights and voting rights via the issuance of dual-class shares is used to create controlling shareholder structures in order to preserve these private benefits. Thereby, we analyze the effect of different types of private benefits on dual-class adoption and subsequent control transfers. Third, we show that the market cares about private benefits of control and find a puzzling as well as significant underperformance of dual-class share IPOs.

Working Paper Series