Abstract

http://ssrn.com/abstract=961158
 
 

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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


China Europe International Business School (CEIBS)

Fei Xie


University of Delaware

November 12, 2006


Abstract:     
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
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

Cong Wang
China Europe International Business School (CEIBS) ( email )
Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China
Fei Xie
University of Delaware ( email )
Newark, DE 19711
United States
Feedback to SSRN


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