Reexamining Dual-Class Stock

15 Pages Posted: 24 Aug 2017

See all articles by Vijay Govindarajan

Vijay Govindarajan

Dartmouth College - Tuck School of Business

Anup Srivastava

University of Calgary - Haskayne School of Business

Date Written: August 21, 2017

Abstract

Snapchat’s initial public offering, which provided shares with no voting rights, is a culmination of the growing trend of dual-class shares. It contradicts the precept of one-share, one-vote that is essential for corporate democracy. Snapchat’s action caused uproar among influential investors. In January 2017, a coalition of the world’s biggest money managers, which together control more than $17 trillion in assets, demanded a total ban on dual-class shares. We reason that the increasing prominence of dual-class stock is explained by the confluence of three economic trends: the growing importance of intangible investments, the rise of activist investors, and the decline of staggered boards and poison pills. A dual-class structure offers immunity against proxy contests initiated by short-term investors. It enables managers to ignore capital market pressures and to avoid myopic actions such as cutting research and development, which hurt companies in the long run. Thus, a dual-class structure is optimal in certain scenarios. We put forth alternatives to dual-class structure that enable managers to maintain control while retaining focus on sustainable value creation.

Keywords: Dual-class shares, Corporate governance, Activist investors, Innovation, Myopic actions

Suggested Citation

Govindarajan, Vijay and Srivastava, Anup, Reexamining Dual-Class Stock (August 21, 2017). Business Horizons, Forthcoming; Tuck School of Business Working Paper No. 3023323. Available at SSRN: https://ssrn.com/abstract=3023323

Vijay Govindarajan

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Anup Srivastava (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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