Dual-Class Firms, Agency Problems, and Debt Governance: Evidence from Korea

Abstract

I examine whether debt (or, more generally, a performance threshold) can reduce agency problems between controlling shareholders and minority shareholders in dual-class firms. To do so, I use two key features of debt governance. First, it is only effective with bankruptcy penalties, second, it only matters for firms close to default. I measure agency problems by the voting premium. Using a Korean bankruptcy reform that reduced penalties, I find that risky firms exhibited a 59% increase in the voting premium after the reform relative to safe firms. My findings have important implications for the heated debate on dual-class share structure.

Keywords: Dual-class, debt, corporate governance, bankruptcy, voting premium

JEL Classification: G32, G33, G34, G38, K22