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An agency theory explanation of SEO underperformance: Evidence from dual-class firms

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  • Chaudhuri, Ranadeb
  • Seo, Hoontaek
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    Abstract

    Using a sample of U.S. dual class companies, we empirically investigate the effects of the divergence between insiders’ voting and cash flow rights on market reaction to seasoned equity offerings (SEOs) and long-run stock performance following SEOs. We find that SEO announcement returns and long-run stock performance following SEOs are negatively related to measures of the divergence between insiders’ voting and cash flow rights. Our results support the view of agency theory as a plausible explanation of SEO underperformance. Misalignment of interests between insiders and outside shareholders can create managerial incentives to undertake value-destroying investments to extract private benefits, ultimately leading to a reduction in firm value.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 22 (2012)
    Issue (Month): 3 ()
    Pages: 575-588

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    Handle: RePEc:eee:intfin:v:22:y:2012:i:3:p:575-588

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    Web page: http://www.elsevier.com/locate/intfin

    Related research

    Keywords: Seasoned equity offering; Dual-class stocks; Agency theory;

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