The Effect of Capital Structure and Consolidated Control on Firm Performance: The Case of Dual-Class IPOs

Abstract

We analyze short-term and long-term performance of firms that go public with more than one class of common stock. To assess performance differences that are due to the firm's ownership structure, we create a control sample of single-class IPOs that is matched to the dual-class firms by exchange, offer date, industry, and size. For a comprehensive sample of 98 dual-class IPOs, we document that dual-class firms outperform their matched single-class counterparts in terms of stock-market returns as well as accounting measures of firm performance. Moreover, we find no statistically significant abnormal long-run performance over a three year horizon for dual-class firms. This contrasts with Ritter's (1991) result that IPOs significantly underperform in the three years after going public. We conclude that going public with a dual-class equity structure has net benefits for investors in those firms that choose this specific organizational structure, as evidenced by better operating performance and larger equity returns relative to other IPOs.

JEL Classification: G32, G34