Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Structures
45 Pages Posted: 21 Mar 2018
Date Written: April 14, 2018
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: Suggested Citation