Business Administration Faculty Publications

Institutional Ownership of Dual-Class Companies

Document Type

Article

Publication Date

2-19-2021

Journal Title

Journal of Financial Economic Policy

ISSN

1757-6385

Volume

13

Issue

2

First Page

206

Last Page

222

DOI

https://doi.org/10.1108/JFEP-04-2020-0061

Abstract

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.

Keywords

Investments, investment decisions, firm management

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