Do Excess Control Rights Benefit Creditors? Evidence from Dual-Class Firms

Abstract

Excess control rights by inside shareholders have been documented to hurt minority shareholders. This paper shows that such governance feature may benefit creditors. Using a sample of U.S. dual-class firms, I show that these firms take less operational and financial risk than similar single-class firms, consistent with insiders’ emphasis on long-term survival to access ongoing private control benefits. Such risk avoidance translates into lower borrowing costs for dual-class firms. Further, lenders are able to use specific covenants to prevent potential expropriations by insiders. The overall relationship between excess control rights and firm value may be less negative than previously thought.

Keywords: excess control rights; dual-class firms; risk-taking; cost of debt; debt covenant; private control benefits

JEL Classification: G21, G32, G34