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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)

Cong Wang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Fei Xie

Clemson University

November 12, 2006

We use a sample of U.S. dual-class companies to examine how the divergence between insider control rights and cash-flow rights affects managerial extraction of private benefits of control. We find that as the insider control-cash flow rights divergence becomes larger, dual-class acquirers experience lower acquisition announcement-period abnormal stock returns, CEOs receive higher levels of compensation, corporate cash holdings are worth less to outside shareholders, and capital expenditures contribute less to shareholder value. These findings are robust to both a wedge and a ratio measure of the control-cash flow rights divergence. They 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: 48

Keywords: Dual class shares, dual class stock, agency costs, conflicts of interest, voting rights and cash flow rights wedge, acquisitions, announcement effects, empire building, executive compensation, CEO compensation, value of cash holdings, capital expenditures

JEL Classification: D21, D23, D82, G14, G31, G32, G34, J33, K22, M52

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Date posted: February 6, 2007 ; Last revised: January 5, 2008

Suggested Citation

Masulis, Ronald W. and Wang, Cong and Xie, Fei, Agency Problems at Dual-Class Companies (November 12, 2006). Available at SSRN: http://ssrn.com/abstract=961158 or http://dx.doi.org/10.2139/ssrn.961158

Contact Information

Ronald W. Masulis (Contact Author)
University of New South Wales - Australian School of Business ( email )
Sydney, NSW 2052
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
HOME PAGE: http://www.firn.org.au

Cong Wang
The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )
Shatin, N.T.
Hong Kong
(852)26961913 (Phone)
(852)26036586 (Fax)
Fei Xie
Clemson University ( email )
101 Sikes Ave
Clemson, SC 29634
United States
(864) 656-0774 (Phone)
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References:  68
Citations:  58

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