Dual class IPOs: A theoretical analysis
AbstractWe 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 InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 36 (2012)
Issue (Month): 1 ()
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Dual class shares; IPO; Voting structure; Antitakeover provisions;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
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