The Value of Blockholder Liquidity and the Decision to Unify Share Classes

Abstract

From 1988 to 2007, over 1,100 publicly traded firms used the dual class structure. Despite the structure's effectiveness at maintaining control, approximately one fourth of these firms eliminated the dual class structure. In 95 firms, superior shareholders voluntarily eliminated the dual class structure by means of a share conversion or shareholder proposal. On average, blockholders lost half of their voting power during the year of the unification (from 51.4% to 26.0%). In this study, I examine the firms who voluntarily unify their share classes in order to determine why blockholders willingly give up such large stakes in voting power. I find 70% of unifying firms specifically state "increase liquidity" as a primary reason for unifying their share classes. Also, I find blockholders maintain or slightly increase their voting power prior to the unication, but then dramatically decrease their voting power in the three years after the unification. I find two-thirds of the drop in voting power is attributable to reductions in blockholder holdings rather than share dilutions. In addition, I find over 40% of blockholders completely exit the firm within three years. Based on the empirical evidence, I conclude blockholders are willing to lose signicant portions of voting power in order to increase their own personal liquidity.

Keywords: Dual Class, Corporate Governance, One-Share One-Vote, Unification, Blockholder Liquidity

JEL Classification: G32, G34