On the Decision to Go Public with Dual Class Stock

Arugaslan, Onur; Cook, Douglas O.; Kieschnick, Robert L.

doi:10.2139/ssrn.1402756

Cited by 10 publications

(6 citation statements)

References 46 publications

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“…Arugaslan et al (2010) examine several competing reasons why firms may choose a dual-class structure of shares when going public. They find that the primary reason why firms go public with a dual-class equity structure is to allow insiders to diversify their portfolios, and hence decrease excessive exposure to firm-specific risk, while maintaining control of the firm.…”

Section: Literature Review and Research Expectationsmentioning

confidence: 99%

“…These prior studies raise the question of the role of alternate governance mechanisms in firms characterized by disproportionate insider control and to the possible channels through which disproportionate insider control leads to lower shareholder value. Arugaslan et al (2010) and Lehn et al (1990) highlight that firms elect a dual-class equity structure to enable insiders to maintain control of the firm. The notion that insiders then may voluntarily increase the effectiveness of alternate governance mechanisms is consistent with Jensen and Meckling (1976), who show that insiders will find it in their interest to self-bond by putting external governance mechanism in place, and hence limit their opportunities for self-dealing, as long as the net increase in wealth generated from these self-bonding activities (by reducing agency costs and therefore increasing the value of the firm) is more valuable than the perquisites given up.…”

Section: Literature Review and Research Expectationsmentioning

confidence: 99%

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Disproportionate insider control and board of director characteristics

Baran

Forst

2015

Journal of Corporate Finance

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Section: Literature Review and Research Expectationsmentioning

confidence: 99%

Section: Literature Review and Research Expectationsmentioning

confidence: 99%

Disproportionate insider control and board of director characteristics

Baran

Forst

2015

Journal of Corporate Finance

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“…Prior empirical evidence on the association between disproportionate insider control and innovation is very limited (Bebchuk and Kastiel (2017)) and has produced mixed results. While Jordan, Kim, and Liu (2016) find that a dual class structure helps to promote risk-taking and R&D spending in growth stocks, Arugaslan, Cook, and Kieschnick (2010) find that dual class firms do not increase R&D spending after an IPO. Instead, they find that these firms go public simply to diversify insider holdings, which is also supported by Helwege, Pirinsky, and Stulz (2007) in the case of both single and dual class firms.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 98%

Dual Class Share Structure and Innovation

2018

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We find a positive association between disproportionate insider control and patent output, quality, creativity, and the efficient use of R&D in innovation. Managers of firms characterized by disproportionate control also take more personal innovative risk by filing their own patents. By controlling for standard entrenchment measures, we also find that insider entrenchment due to superior voting rights is distinct from entrenchment derived from standard antitakeover measures. Disproportionate insider control fosters innovation more than other forms of entrenchment. Positive effects are confined, however, to financially constrained firms and dissipate within ten years following the IPO. Dual class firms with financial constraints prefer to issue debt and are more likely to issue debt after collateralizing their patent portfolio. Our results, which control for self-selection bias by using a sample of dual and single class firms matched on their innovativeness pre-IPO, therefore support the recent call for sunset provisions on dual class shares.

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“…Several studies have addressed the motivation for creating dual-class shares. Arugaslan et al (2010) look at all dual-class IPOs from 1980 to 2008 and argue for a primary motive among founders and company insiders: retaining control. Dalziel et al (2011) argue that the principals in IPOs use these voting rights as “governance mechanisms” to protect against dilution of control and to prevent potential conflicts with powerful investors who may not share their long-term vision or focus.…”

Section: Motivations Advantages and Disadvantages Of Dual-class Companiesmentioning

confidence: 99%

Institutional ownership of dual-class companies

Burson

Jensen

2021

JFEP

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Purpose This study aims to examine institutional ownership of companies that go public with dual-class share structures. Design/methodology/approach Several recent studies have discussed the potential advantages and disadvantages of the dual-class structure, which allows founders and insiders to maintain control of the firms they created through superior voting rights. Institutional investors oppose the dual-class structure, arguing that inferior voting rights make it difficult to respond to poor governance or performance. Previous research has shown the early value-added to the dual-class firm declines through time. This study examines institutional ownership of dual-class companies through time and compares institutional investments in initial public offerings with perpetual superior-class structures versus those with provisions to sunset those shares to one-share, one-vote structures. Findings Evidence suggests that institutional investors view perpetual dual-class structures as potentially riskier in terms of poor governance or performance and prefer dual-class companies with sunset provisions. Originality/value This study suggests that founders and insiders should consider either the dual-class structure with a sunset provision or if they choose the perpetual dual-class, it should include some type of event-driven safeguards.

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On the Decision to Go Public with Dual Class Stock

Cited by 10 publications

References 46 publications

Disproportionate insider control and board of director characteristics

Disproportionate insider control and board of director characteristics

Dual Class Share Structure and Innovation

Institutional ownership of dual-class companies

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