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Agency Problems at Dual-Class Companies

49 Pages Posted: 7 May 2008 Last revised: 13 Jul 2008

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Cong Wang

China Europe International Business School (CEIBS)

Fei Xie

University of Delaware

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Abstract

We use a sample of U.S. dual-class companies to examine how the divergence between insider voting rights and cash-flow rights affects managerial extraction of private benefits of control. We find that as the divergence widens at dual-class companies, corporate cash holdings are worth less to outside shareholders, CEOs receive higher levels of compensation, managers are more likely to make shareholder-value destroying acquisitions, and capital expenditures contribute less to shareholder value. These findings 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 divergence, acquisitions, announcement effects, empire building, executive compensation, CEO compensation, value of cash holdings, capital expenditures

Suggested Citation

Masulis, Ronald W. and Wang, Cong and Xie, Fei, Agency Problems at Dual-Class Companies. Journal of Finance, Forthcoming; 3rd Annual Conference on Empirical Legal Studies Papers; ECGI - Finance Working Paper No. 209/2008. Available at SSRN: https://ssrn.com/abstract=1080361

Ronald 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

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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

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