Large Shareholder Diversification, Corporate Risk Taking, and the Benefits of Changing to Differential Voting Rights

34 Pages Posted: 19 Nov 2011  

Scott W. Bauguess

US Securities & Exchange Commission

Myron B. Slovin

Louisiana State University, Baton Rouge - Department of Finance; HEC Paris

Marie E. Sushka

Arizona State University

Date Written: October 12, 2011

Abstract

We show how the change to differential voting rights allows dominant shareholders to retain control even after selling substantial economic ownership in the firm and diversifying their wealth. This unbundling of cash flow and control rights leads to more dispersed economic ownership and a closer alignment of dominant and dispersed shareholder interests. When insiders sell sizable amounts of their economic interests, firms increase capital expenditures, strengthen corporate focus, divest non-core operations, and generate superior industry-adjusted performance. The change to differential voting rights both fosters corporate control activity and creates higher takeover premiums that are paid equally to all shareholders.

Keywords: Differential voting rights, one-share-one-vote, tag-along rights

JEL Classification: G34

Suggested Citation

Bauguess, Scott W. and Slovin, Myron B. and Sushka, Marie E., Large Shareholder Diversification, Corporate Risk Taking, and the Benefits of Changing to Differential Voting Rights (October 12, 2011). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1961347 or http://dx.doi.org/10.2139/ssrn.1961347

Scott W. Bauguess (Contact Author)

US Securities & Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States
(202) 551-6660 (Phone)

Myron B. Slovin

Louisiana State University, Baton Rouge - Department of Finance ( email )

2163 CEBA
Baton Rouge, LA 70803
United States
480-820-5949 (Phone)

HEC Paris ( email )

France
33146476045 (Phone)

Marie E. Sushka

Arizona State University ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States
602-965-3131 (Phone)
602-965-8539 (Fax)

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