The Effect of Internal and External Corporate Governance on Dual Class Firms

Abstract

We examine the effects of internal and external corporate governance and monitoring mechanisms on the dual-class status and the firm value of dual-class firms. Employing 736 dual-class firms and 7,027 single-class firms in U.S., we find that dual-class firms tend to be larger, and have higher director ownership, higher institutional ownership, lower blockholdings, and a smaller fraction of independent directors on their boards than single-class firms. In addition, we observe that dual-class firms are followed by a smaller number of security analysts. After correcting for endogeneity bias, our results show that not only firms with higher analyst coverage, but also firms with higher analyst following and a lower wedge, measured as the difference between voting rights and cash flow rights, are strongly associated with Tobin’s q. In contrast, blockholders’ ownership, board independence, and institutional ownership play a relatively insignificant role in enhancing dual-class firm value. We interpret these results suggest that security analysts are one of the most effective monitoring mechanisms that influence both the dual-class choice and firm value. Our results are not attributed either to the difference in firm size or to an industry effect.

Keywords: Dual-class firms, Corporate governance, Analyst following

JEL Classification: G34, L2