Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Structures
48 Pages Posted: 21 Mar 2018 Last revised: 15 Jul 2018
Date Written: June 30, 2018
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: Suggested Citation