Timing and Wealth Effects of German Dual Class Stock Unifications

Abstract

Abstract:This paper studies the reasons and the costs of separating ownership from control by analyzing the decision of German dual class firms to consolidate their share structure from dual to single class equity between 1990 and 2001. We find that the firm value increases significantly by an average 4% on the announcement day. A significant part of the variation in abnormal returns can be explained by the ownership structure. A logit analysis of the unification decision yields that firms with less entrenched management are more likely to unify. Also, firms that are financially constrained are more likely to abolish dual class shares; these firms often issue additional shares after the stock unification. JEL Classification Codes: G32, G34# We would like to thank Ernst Maug, Colin Mayer, Fabrice Riva, Mario C. Santos, and seminar participants at the 2003 Meeting of the German Finance Association and the 2004 Meeting of the European Financial Management Association for helpful discussions and comments. We also thank Christian Bassen for valuable research assistance. A previous version of this paper was circulated under the title "When do firms abolish dual class stocks?".

The determinants of the voting premium in Italy: The evidence from 1974 to 2003

“…When the voting premium increased in the late 1980s, the number of firms issuing non-voting stock also increased. However, similarly to European countries (Hoffmann-Burchardi, 1999;Dittmann and Ulbricht, 2008;Pajuste, 2005), from the early 1990s few firms issued new non-voting shares, and the number of firms with non-voting shares outstanding decreased due to acquisitions, bankruptcies, and stock unifications. Table 2 also groups firms year-by-year according to the type of largest shareholder.…”

“…They are entitled to a minimum dividend (of not less than 5% of the par value) and an additional dividend over and above the dividend paid on voting shares (usually 2-3% of the par value, depending upon company choice) each time a dividend is paid on voting shares. In contrast to Germany (Dittmann and Ulbricht, 2008), non-voting shares do not carry any temporary voting rights if minimum dividends are not paid, but if payment of dividends is suspended, the rights to unpaid minimum dividend distributions are cumulated for the following two years. The privilege attached to non-voting shares in the event of liquidation consists of a priority claim: once creditors are fully repaid, the nominal value of non-voting shares is repaid first, and voting shareholders are then paid off only if there are any funds left.…”

Why are shareholders not paid to give up their voting privileges? Unique evidence from Italy

“…Using a sample of unifications across Europe, Pajuste (2005) finds that the probability of a forced stock unification is positively related to the issue of new equity, the number of acquisitions, and the presence of growth opportunities, and negatively related to the presence of a high voting premium. 3 Dittmann and Ulbricht (2008) examine a sample of unifications in Germany and find that the probability of abolishing a dual class structure is higher for firms that issue new equity, larger firms, firms with a high proportion of voting shares and firms where the largest block of voting shares is small. Ehrhardt et al (2008) report a dilution of the controlling block of votes in a German unification sample, a significantly positive market reaction at the announcement for both the voting and non-voting shares (of about 4% each) and an increase in the stock's liquidity after the unification.…”

Long term changes in voting power and control structure following the unification of dual class shares

“…(Earlier evidence by Bergstrom and Rydqvist, 1990, supports an opposite view.) Even closer to the focus of the present study, Dittmann and Ulbricht (2008) examine unifications of dual class shares in Germany and find a favorable market response to this change (see also Ehrhardt et al 2006). Pajuste (2005) presents cross-European evidence on the likelihood of share unification, describes the declining popularity of dual shares in Europe in recent years, and documents improved corporate performance following the unification.…”