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Dual class IPOs: A theoretical analysis

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  • Chemmanur, Thomas J.
  • Jiao, Yawen

Abstract

We consider an incumbent who wishes to sell equity to outsiders at an IPO to implement his firm’s project. He may be talented (lower cost of effort, comparative advantage in project-implementation) or untalented. The project may have high (intrinsically more valuable, but showing less signs of success in the near-term) or low near-term uncertainty. Under a single class share structure, the incumbent has a greater chance of losing control to potential rivals if he undertakes the project with high near-term uncertainty, since outsiders may vote for the rival if they believe the project is not progressing well. A dual class share structure allows the incumbent to have enough votes to prevail against any rival, but may be misused by untalented incumbents to dissipate value. Our results help to explain firms’ choices between dual class and single class IPOs and the post-IPO operating performance of dual class versus single class firms.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 1 ()
Pages: 305-319

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:1:p:305-319

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

Related research

Keywords: Dual class shares; IPO; Voting structure; Antitakeover provisions;

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References

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Cited by:
  1. Jordan, Bradford D. & Liu, Mark H. & Wu, Qun, 2014. "Corporate payout policy in dual-class firms," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 1-19.
  2. Bauguess, Scott W. & Slovin, Myron B. & Sushka, Marie E., 2012. "Large shareholder diversification, corporate risk taking, and the benefits of changing to differential voting rights," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1244-1253.

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