Bolstering Family Control: Evidence from Loyalty Shares

Abstract

We study the introduction of a new control-enhancing mechanism in Italy, a country characterized
by family-controlled firms and growing shareholders’ protection by institutional
investors. Since 2014, Italian firms have been able to adopt loyalty shares, which allow
a double voting right if shares are continuously held for at least two years. We find that
about 20 percent of listed firms have introduced loyalty shares, and family-controlled firms
are the most likely adopters. Loyalty shares neither anticipate acquisitions, nor equity
issues by the adopting firm. Instead, they allow controlling shareholders to reduce their
equity stake without losing control. We report no evidence of an adverse wealth effect
both at the adoption and in the years following it. Institutional investors oppose the introduction
of loyalty shares, yet they do not reduce their holdings in adopting firms. Overall,
our evidence suggests that bolstering family control is the main effect of the introduction
of loyalty shares.

Keywords: Loyalty shares, Family firms, Long-term shareholders; Control-enhancing mechanisms

JEL Classification: G32, G34