What Drives the Use of Dual-Class Structures in Technology IPOs?

Abstract

This paper contributes to the longstanding and escalating debate over the use of dual-class structure in initial public offerings (IPOs) by introducing a novel measurement to analyze factors influencing technology-based firms in their decision to employ a dual-class structure. Using media coverage of firms’ founders prior to their IPO as a proxy for their idiosyncratic vision, this paper’s first and primary finding indicates that idiosyncratic vision strongly predicts the use of dual-class structure among technology-based firms. Further analysis shows that the effect of media coverage as a proxy for a founder’s idiosyncratic vision differs according to a firm’s state of incorporation, such that idiosyncratic vision is of greater importance for firms incorporated outside of the state of Delaware. While exploring possible explanations for this striking finding, this analysis also highlights certain costs associated with the penalties and obstructions institutional investors impose to discourage divergence from a single-class, one-share, one-vote structure.

Keywords: Corporate governance, Agency problems, Investor protection, Entrenched management, Capital structure, Controlling shareholders, Dual-class stock, Incentives, IPOs, Shareholder voting, Tech companies, Innovation

JEL Classification: K22