On the Decision to Go Public with Dual Class Stock

Abstract

Why do firms deviate from a one share-one vote regime when going public? We consider three arguments for this choice. Examining data on U.S. IPOs from 1980 through 2008, we do not find that firms that go public with dual class stock so managers have more incentive to invest in hard to monitor projects or to gain more when selling control of the firm. Rather managers appear to take their firms public with dual class stock so that they can retain control of their firm while reducing their wealth exposure to firm-specific risk by more than would be possible if they went public with a single class stock.

Keywords: IPO, dual class stock, one share-one vote

JEL Classification: G32