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

45 Pages Posted: 21 Mar 2018  

Hyunseob Kim

Cornell University - Samuel Curtis Johnson Graduate School of Management

Roni Michaely

Cornell University - Cornell Tech NYC

Date Written: April 14, 2018

Abstract

This paper provides comprehensive evidence that firm maturity is an important determinant of the benefits and costs of adopting a dual-class share structure. Relative to single-class firms, we find that dual-class firms have 6%–7% higher Tobin’s q when they are young but experience a 7%–9% larger decline in valuation as they mature, closing the valuation gap. Young dual-class firms exhibit higher margins than young single-class firms but their performance deteriorates more rapidly as they mature. Consistent with increasing private benefits of control with maturity, we find that as dual-class firms mature, i) the voting premium increases and ii) announcement returns for dividend increases or initiations increase. The pace of innovation, as measured by quantity and quality of patents, also declines faster for mature dual-class firms relative to mature single-class firms. In addition, we find that, as dual-class firms mature, their investment and employment become less sensitive to q, and equities become riskier than those of mature single-class firms. Overall, the evidence points toward declining net benefits of dual class structure over firm maturity, suggesting that corporate governance should evolve dynamically. An important policy implication of this study is that a dual-class structure should not be prohibited but rather, should always be accompanied by a sunset provision.

Keywords: dual-class shares, voting premium

JEL Classification: G32, G34

Suggested Citation

Kim, Hyunseob and Michaely, Roni, Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Structures (April 14, 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

Cornell University - Cornell Tech NYC ( email )

2 West Loop Rd
New York, NY 10044
United States

Register to support our free research

Register

Paper statistics

Downloads
89
Abstract Views
376
PlumX