Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Structures

48 Pages Posted: 21 Mar 2018 Last revised: 15 Jul 2018

Hyunseob Kim

Cornell University - Samuel Curtis Johnson Graduate School of Management

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI)

Date Written: June 30, 2018

Abstract

Contrary to the common view that proportional voting rights are always optimal, we find that young dual-class firms trade at a premium and operate at least as efficiently as young single-class firms. As they mature, however, they become less agile and efficient (in terms of operating margins, innovative output, and labor productivity) relative to their single-class counterparts. Indeed, their relative valuation declines, and voting premiums and the perceived value of dividend increase with maturity, suggesting that agency issues become more severe. While sunset provisions are a sensible solution to these agency problems, most dual-class firms adopt ineffective provisions. We show that using provisions conditional on firm age or growth provides an effective solution that is time consistent and increases valuation.

Keywords: Governance, Dual Class, Sunset Provisions, Maturity, Agency

JEL Classification: G14, G18, G30

Suggested Citation

Kim, Hyunseob and Michaely, Roni, Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Structures (June 30, 2018). Available at SSRN: https://ssrn.com/abstract=3145209 or http://dx.doi.org/10.2139/ssrn.3145209

Hyunseob Kim (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

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