Agency Problems at Dual-Class Companies

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.

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

Working Paper Series