Impact of Restricted Voting Share Structure on Firm Value and Performance

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: In this study, we examine whether firm value, operating performance, and stock performance of the Canadian firms which have issued restricted voting shares (RVS) is different from comparable non-RVS firms. We test two competing hypotheses -the controlling shareholder expropriation hypothesis and the investor protection and substitution hypothesis for the Canadian RVS firms. Research Findings/Insights: Based on a ten-year panel data sample and extensive robustness tests, we do not find that the RVS firms have lower firm value, operating performance, or stock performance than the non-RVS firms in Canada. There is also no evidence of shareholder value expropriation in key financial decisions, such as mergers and acquisitions and dividend payments. The study does not support the controlling shareholder expropriation hypothesis in the Canadian RVS firms. Theoretical/Academic Implications: The RVS structure has been criticized for lack of shareholder rights protection and risk of value entrenchment in the corporate governance literature. However, the existing empirical evidence is mainly based on the firms in the United States. Using a Canadian sample, we show that these results are a function of corporate governance and regulatory environment and the US results cannot be generalized. We find no evidence of shareholder value appropriation nor do we find differential value or performance implications. We believe that a blanket rejection of RVS structure may not be warranted. Practitioner/Policy Implications: Our study concludes that the RVS structure in Canadian firms is influenced by the nature of these firms and the regulatory environment in Canada that protects minority shareholders from wealth appropriation. Our evidence suggests that policy makers and practitioners should evaluate RVS firms on their individual merit and in individual countries -no generalization is warranted.

Board effectiveness and firm performance of Canadian listed firms

“…Whilst the number of firms with a dual-class share structure that are listed on the TSX has dropped from 14% in 1993 to 6% in 2010, (Amoako-Adu et al, 2011), the structure has been criticised for the risk of value entrenchment and the lack of shareholder rights. However, Jog et al, (2010), using a Canadian sample, find that firms with a dual-class share structure do not have lower firm value, lower operating performance or inferior long-term stock performance compared to non dual-class share structure firms. Klein et al, (2005) use ownership percentage as a potential alternative governance mechanism.…”

“…The existence of an alternative corporate governance mechanism that is complementary to the BSCI single grading can strengthen the link between Tobin's Q and grading. Canadian firms may have a dual-class share structure, since there is no legal prohibition on such a structure; such firms tend to be smaller in size and are managed or closely-held by the founders, (Jog et al, 2010). Whilst the number of firms with a dual-class share structure that are listed on the TSX has dropped from 14% in 1993 to 6% in 2010, (Amoako-Adu et al, 2011), the structure has been criticised for the risk of value entrenchment and the lack of shareholder rights.…”

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

“…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.…”

“…Different authors investigate this effect and conclude with different opinions, but mainly they can be divided into two groups or schools of thought (Jog et al 2010). Researchers from the first school of thought argue that insiders of dual-class firms entrench management with superior voting rights which result in the expropriation of minority shareholders' rights and this entrenchment leads to negative performance (Grossman and Hart 1988).…”

Examining the Relationship between Disproportional Ownership Mechanisms and Company Performance: An Empirical Research

“…As a result, research in this tradition has provided evidence on a negative effect of disproportional ownership on firm outcomes (Core, Holthausen, & Larcker., 1999;Claessens, Djankov, Fan, & Lang, 2002) or has found a U-shaped relationship between ownership concentration and company performance (Hu & Izumida, 2008). Differently, studies belonging to the second stream of research have emphasized that the effect of ownership structures on company performance depends on the context and have pointed out that, in given circumstances, blockholders can be motivated to maximize corporate value (Thomsen & Pedersen, 2000;Jog, Zhu, & Dutta, 2010). In this sense, the presence of controlling shareholders can produce benefits that outperform the potential risks for minority shareholders (Jin & Park, 2015), reflecting in better company outcomes (Barontini & Caprio, 2006;Almeida & Wolfenzon, 2006b;Hanousek, Kočenda, & Svejnar, 2007;Carvalhal, 2012;Gonzá lez, Guzmá n, Pombo, & Trujillo, 2012).…”