To Extract or Not to Extract: An Examination of the Dual Class Discount, and the Channels of Extraction of Private Benefits

57 Pages Posted: 29 Sep 2011

See all articles by Vishaal Baulkaran

Vishaal Baulkaran

University of Lethbridge

Ben Amoako-Adu

Wilfrid Laurier University - School of Business & Economics

Brian F. Smith

Wilfrid Laurier University

Date Written: July 25, 2011

Abstract

Several recent studies provide evidence that dual class firms are discounted compared to similar single class companies due to the extraction of private benefits and agency costs. However, the channels through which private benefits are extracted have not been fully explored in the literature. With a propensity score matched sample of S&P 1500 dual class and single class companies with concentrated control, this paper investigates the link between the observed valuation discount of dual class companies and three channels through which private benefits can be extracted: excess executive compensation, excess capital expenditure and excess cash holdings. This research provides evidence that excess compensation and excess cash holdings of dual class companies are directly related to the discount that investors apply to the value of dual companies. The findings indicate that excess compensation is paid to executives in dual class companies and the degree of excess compensation is greatest for executives who are family members. The results also show that dual class firms retain more cash compared to single class concentrated control firms. However, capital expenditure is not statistically significant in explaining the dual class discount.

Keywords: Dual Class Discount, Executive Compensation, Cash Holdings, Family Ownership and Control

JEL Classification: G30; G32; G34; J33

Suggested Citation

Baulkaran, Vishaal and Amoako-Adu, Ben and Smith, Brian Frederick, To Extract or Not to Extract: An Examination of the Dual Class Discount, and the Channels of Extraction of Private Benefits (July 25, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1894910 or http://dx.doi.org/10.2139/ssrn.1894910

Vishaal Baulkaran (Contact Author)

University of Lethbridge ( email )

4401 University Dr.
Lethbridge, Alberta T1K 3M4
Canada
403-329-2074 (Phone)

Ben Amoako-Adu

Wilfrid Laurier University - School of Business & Economics ( email )

Financial Services Research Centre
Waterloo, Ontario N2L 3C5
CANADA
519-884-1970 (Phone)
519-884-0201 (Fax)

Brian Frederick Smith

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5
Canada

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