Recapitalization of One Class of Common Stock into Dual-Class: Growth and Long-Run Stock Returns

45 Pages Posted: 2 Aug 2003

See all articles by Valentin Dimitrov

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems

Prem C. Jain

Georgetown University

Date Written: September 1, 2004

Abstract

We study a sample of 178 firms that changed from a one-share one-vote into a dual-class common stock structure during 1979-1998. We find that dual-class recapitalizations are shareholder value enhancing corporate initiatives. Using accounting data, Lehn, Netter and Poulsen (1990) provide evidence that dual-class recapitalizing firms grow faster than firms in a control group and undertake secondary equity offerings (SEOs) to finance growth. We show that growth is indeed beneficial to the shareholders. The stockholders, on average, earn significant positive abnormal returns of 23.11% in a period of four years following the announcement month. Furthermore, abnormal returns are even larger (52.61%) for the dual-class firms that issue equity. This evidence is especially supportive of the value enhancing hypothesis as it is contrary to the prevailing result that SEOs are generally followed by large negative returns. We do not find any evidence of managerial entrenchment.

Keywords: Dual-class structure, Corporate governance, Long-run performance

JEL Classification: G14, G31, G32, G34

Suggested Citation

Dimitrov, Valentin and Jain, Prem C., Recapitalization of One Class of Common Stock into Dual-Class: Growth and Long-Run Stock Returns (September 1, 2004). Available at SSRN: https://ssrn.com/abstract=422080 or http://dx.doi.org/10.2139/ssrn.422080

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
Newark, NJ 07102
United States

Prem C. Jain (Contact Author)

Georgetown University ( email )

McDonough School of Business
Georgetown Univeristy
Washington, DC 20057
United States
202-697-9455 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
787
Abstract Views
4,760
rank
40,345
PlumX Metrics