Dual class common stock: an analysis of the agency costs of differential voting rights
Sisneros, Phillip M
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The emergence of firms that have issued two classes of common stock that possess different voting rights has resulted in a reexamination of the relationship between the stockholders and management of the firm. Stockholder voting is considered by some market participants to be an important tool in constraining the self-serving actions of management. These participants support the maintenance of a "one share, one vote" standard. Other participants view the issuance of a second class of stock that has diminished or no voting rights as a value maximizing strategy. In their opinion, the dual class capital structure gives management the opportunity to invest in projects whose returns are difficult to convey to outside investors. In addition to these opposing viewpoints, the fact that the majority of investors fail to vote on corporate matters or routinely appoint management as their proxy calls to question the importance of voting. This dissertation attempts to determine whether the market values the voting rights attached to common equity. The value of voting is addressed in three ways. First, the relative market prices of superior and inferior classes of stock issued by a dual class firm are examined to determine if the superior voting shares command a premium in the market. Second, a sample of dual class and single class firms is examined to determine whether the differential voting rights of the two types of firms affect the relative value (price-earnings multiple) of their stock. Finally, a sample of publicly traded firms that announce a dual class recapitalization is examined to determine if the change in the relative voting status of the existing investors has an impact on their wealth. The results indicate that the superior class of stock does command a premium relative to the inferior class of stock issued by the same firm. An attempt to explain the premium as a function of insiders' incentive for perk consumption was not successful. The analysis of the relative valuation of a sample of dual class and single class firms indicates that the inferior class of stock issued by dual class firms is not penalized in the market for its diminished voting rights. Finally, the announcement of a dual class recapitalization did not have a significant impact on the wealth of existing stockholders.