A review of the literature on dual-class firms

Abstract

Purpose The purpose of this paper is to critically review the relevant literature from the perspective of dual-class firms and to provide suggestions for future research on dual-class firms, and on methodological issues that should be addressed in such research. Design/methodology/approach The research design consists of three parts: an introduction to dual-class firms (motivations for; firm life cycle effects) in Part 1; concerns with firms with such share class structures (valuation; governance; accounting and corporate policy issues) in Part 2; and some solutions or ways to accommodate the trade-offs involved with such share class structures (retention arguments; index/exchange exclusions; contractual provisions; external monitoring) in Part 3. Throughout the paper, the authors provide some critiques of existing studies, particularly from a methodological perspective, the authors’ opinion on the state of the literature and suggestions for future areas of research. Findings While motivations for the use of dual-class voting structures include flexibility so that the idiosyncratic vision of their entrepreneurs/founders can be pursued in a less encumbered fashion, greater innovation and long-term managerial orientation, there are many possible costs (e.g. underinvestment and managerial entrenchment) to this ownership structure. Nevertheless, the authors believe that such firms should have provisions in place that facilitate a reversion to a single-class structure longer term when such firms have become more mature, less dependent on the idiosyncratic vision of the entrepreneurs/founders at IPO and have attracted more managerial talent. Originality/value The literature arrives at no consensus on the benefits/drawbacks of this type of share ownership structure which means that many topics of research require further academic examination. The authors provide suggested directions for such future enquiries.

The Effect of Dual-Class on Earnings Management: A Case of Chinese Listed Companies in US

“…The dual-class structure permits insiders to uphold a level of control that exceeds their ownership stake in the company, achieved through a configuration that confers voting rights in favor of these insiders (Yan, 2021). An additional facet of the dual-class structure involves empowering founders or insiders to maintain control, thus affording them the latitude to pursue long-term visions or strategies without being encumbered by immediate repercussions (Winden, 2018;Hossain, 2019). As posited by Jordan et al (2016), dual-class companies experience diminished short-term market pressures, concurrently gaining increased prospects for growth such as heightened sales growth and intensified research and development (R&D) endeavors.…”