Dual-Class Shares and Firm Valuation: Market-Wide Evidence from Regulatory Events

Abstract

In the 1980s, stock exchanges and eventually the SEC took actions that affected the eligibility of listed firms to adopt dual-class shares with differential voting rights. In contrast to previous work, we use methodology relying on market-wide reactions to multiple regulatory events to show that risk-adjusted stock returns increase (decrease) in reaction to events that decrease (increase) the probability of firms' ability to adopt dual-class shares. This short-run reaction varies systematically across firms, suggesting that investors view dual-class shares positively in research-intensive and well-governed firms. In the long run, banning dual-class shares leads to lower research output, firm value, and profitability. Overall, our results suggest that dual-class shares increase valuations and facilitate innovation.

Keywords: Dual Class, One-Share One-Vote, Rule 19c-4, Regulation, Innovation

JEL Classification: G14, G18, G32, G34, K22