Ownership, Investment and Governance: The Costs and Benefits of Dual Class Shares

65 Pages Posted: 30 Nov 2012 Last revised: 18 Jan 2018

See all articles by Suman Banerjee

Suman Banerjee

Stevens Institute of Technology; Stevens Institute of Technology

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Date Written: August 17, 2017

Abstract

We show that dual-class shares can be a solution to agency conflicts rather than a result of agency conflicts. When firms with a controlling shareholder issue voting shares to fund projects, the risk of losing control rises, which can threaten the controller’s private benefits. Thus, incumbents may forgo positive NPV investments to maintain control. Non-voting shares allow firms to fund projects without diluting an incumbent’s voting rights; which alleviates the underinvestment problem. But, issuing non-voting shares dilutes dividends per share and facilitates entrenchment, reducing value-enhancing takeover bids. We derive conditions when the benefits from using non-voting shares outweigh its costs.

Keywords: Blockholders, Controlling shareholders, Dual-class shares, Hostile takeovers, Ownership structure, Private benefits of control, Non-voting shares, Shareholder welfare, Takeover defenses, Underinvestment, Voting rights

JEL Classification: G32, G34, G38, K20

Suggested Citation

Banerjee, Suman and Masulis, Ronald W., Ownership, Investment and Governance: The Costs and Benefits of Dual Class Shares (August 17, 2017). ECGI - Finance Working Paper No. 352/2013, FIRN Research Paper, Stevens Institute of Technology School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=2182849 or http://dx.doi.org/10.2139/ssrn.2182849

Suman Banerjee

Stevens Institute of Technology ( email )

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Stevens Institute of Technology ( email )

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Ronald W. Masulis (Contact Author)

University of New South Wales, Sydney ( email )

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