Does Diversification of Share Classes Increase Firm Value?

49 Pages Posted: 12 Feb 2019

See all articles by Sojung Kim

Sojung Kim

Korea University Business School (KUBS)

Sunwoo Hwang

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Date Written: February 8, 2019

Abstract

Firms can issue stocks classified in many ways. They can be classified in respect to voting rights, dividend rights, redemption rights, conversion rights, and many others. In this study, we ask if it is desirable to give greater freedom to firms in their choices of class shares. Making use of the 2011 Commercial Act amendment that significantly relaxed the regulation on class shares in Korea, we study the motivation and the effect of adopting two newly emerged class shares – preferred stocks convertible to voting stocks at the discretion of management and preferred stocks redeemable at the discretion of investors. We find that firms adopt the former for managerial entrenchment purpose and destroy firm value by doing so. As for the latter, we find that firms adopt them in times of financial distress but fail to stop the downfall in firm value by doing so.

Keywords: share classes, convertible preferred stocks, redeemable preferred stocks, entrenchment, financial distress

JEL Classification: G30, G32, G33, G34

Suggested Citation

Kim, Sojung and Hwang, Sunwoo and Kim, Woochan, Does Diversification of Share Classes Increase Firm Value? (February 8, 2019). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 597/2019; Kenan Institute of Private Enterprise Research Paper No. 19-14. Available at SSRN: https://ssrn.com/abstract=3331089 or http://dx.doi.org/10.2139/ssrn.3331089

Sojung Kim

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701

Sunwoo Hwang

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://sites.google.com/view/sunwoohwang

Woochan Kim (Contact Author)

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/professor/wckim

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

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