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Abstract:This paper studies the reasons and the costs of separating ownership from control by analyzing the decision of German dual class firms to consolidate their share structure from dual to single class equity between 1990 and 2001. We find that the firm value increases significantly by an average 4% on the announcement day. A significant part of the variation in abnormal returns can be explained by the ownership structure. A logit analysis of the unification decision yields that firms with less entrenched management are more likely to unify. Also, firms that are financially constrained are more likely to abolish dual class shares; these firms often issue additional shares after the stock unification. JEL Classification Codes: G32, G34# We would like to thank Ernst Maug, Colin Mayer, Fabrice Riva, Mario C. Santos, and seminar participants at the 2003 Meeting of the German Finance Association and the 2004 Meeting of the European Financial Management Association for helpful discussions and comments. We also thank Christian Bassen for valuable research assistance. A previous version of this paper was circulated under the title "When do firms abolish dual class stocks?".

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