What's in a vote? The short- and long-run impact of dual-class equity on IPO firm values

Abstract

We find that relative to fundamentals, dual-class firms trade at lower prices than do single-class firms both at the IPO date and for at least the subsequent five years. The lower prices attached to dual-class firms do not foreshadow abnormally low stock or accounting returns. However, CEO turnover events do occur less frequently among dual-class firms and the circumstances surrounding CEO turnover vary between single-and dual-class companies. When dual-class firms unify their share classes statistically and economically significant value gains occur. Collectively, our results suggest that the governance associated with dual-class equity influences the pricing of dual-class firms.

Effect of Disproportional Voting Rights on Firm’s Market Performance: Evidence from Chinese Firms Cross-Listed on U.S. Exchanges

“…Claessens et al (2000), Lins (2003), Yeh and Woidtke (2005), and Gompers et al (2010) conclude that divergence between voting rights and cash flow rights lead to lower firm value, and even the performance of the firm becomes poorer. Smart et al (2008) find that dual-class firms neither show better, nor worse, performance than their single-class counterparts. Bohmer et al (1996) find that firms going public with multiple classes of shares outperform both in terms of operating performance, as well as stock performance.…”

“…We use Tobin's Q, abnormal return, and P/E ratio to investigate whether dual-class firms of China are outperforming their single-class counterparts. These variables are frequently used to measure the stock market performance of firms in past literature (e.g., Gompers et al 2003;Smart and Zutter 2003;Adams and Santos 2006;Smart et al 2008;Jog et al 2010). The results are discussed in detail in the discussion of results section of the paper.…”

Superior vs. Inferior Voting Shares: Price Premium or Discount?

“…First, dual-class firms allow the divergence between insider voting rights and cash-flow rights, leading to increased extraction of private benefits of control and a decreased likelihood of takeover premium. Firm value decreases with the increase in the wedge between the voting rights and cash-flow rights (see Gompers et al, 2010;Masulis, Wang, & Xie, 2009;Smart, Thirumalai, & Zutter, 2008). 5 However, under some special circumstances, the dual structure may increase firm value.…”

“…At the announcement of unification of dual classes into a single class, positive abnormal returns are observed (see Howell, 2008;Smart et al, 2008). In addition to economic reasons such as the increase in price or value, regulatory revisions may also drive the unifications, such as the SEC's severe limit on the ability of publicly traded firms to create dual-class capital structure by issuing SV shares in 1988, and the ban of new issues of IV stocks on the Tel Aviv Stock Exchange in Israel in 1990 (Hauser & Lauterbach, 2004;Lauterbach & Yafeh, 2011).…”

Three Essays on Dual-Class Stock Structure

“…Smart, Thirumalai, and Zutter (2008) identify 37 U.S. firms that abolish dual-class structure and perform an event study of the effects of unification on cumulative abnormal returns. They show a positive and significant market reaction to the announcement of dual-class unification.…”