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Incentives vs. Control: An Analysis of U.S. Dual-Class Companies

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  • Paul A. Gompers
  • Joy Ishii
  • Andrew Metrick

Abstract

Dual-class common stock allows for the separation of voting rights and cash flow rights across the different classes of equity. We construct a large sample of dual-class firms in the United States and analyze the relationships of insider's cash flow rights and voting rights with firm value, performance, and investment behavior. We find that relationship of firm value to cash flow rights is positive and concave and the relationship to voting rights is negative and convex. Identical quadratic relationships are found for the respective ownership variables with sales growth, capital expenditures, and the combination of R&D and advertising. Our evidence is consistent with an entrenchment effect of voting control that leads managers to underinvest and an incentive effect of cash flow ownership that induces managers to pursue more aggressive strategies.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10240.

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Date of creation: Jan 2004
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Handle: RePEc:nbr:nberwo:10240

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Citations

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Cited by:
  1. Bennedsen, Morten & Meisner, Kasper, Nielsen, 2006. "The Principle of Proportionality," Working Papers, Copenhagen Business School, Department of Economics 22-2005, Copenhagen Business School, Department of Economics.
  2. Rauh, Joshua D., 2006. "Own company stock in defined contribution pension plans: A takeover defense?," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(2), pages 379-410, August.
  3. Lauterbach, Beni & Yafeh, Yishay, 2009. "Long Term Changes in Voting Power and Control Structure following the Unification of Dual Class Shares," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7287, C.E.P.R. Discussion Papers.
  4. Jean Helwege & Christo Pirinsky & René M. Stulz, 2007. "Why Do Firms Become Widely Held? An Analysis of the Dynamics of Corporate Ownership," Journal of Finance, American Finance Association, American Finance Association, vol. 62(3), pages 995-1028, 06.
  5. Johanna Palmberg & Johan Eklund & Daniel Wiberg, 2011. "Family Ownership and Return on Investments – Founders, Heirs and External Managers," ERSA conference papers ersa10p1517, European Regional Science Association.
  6. Eklund, Johan E. & Palmberg, Johanna & Wiberg, Daniel, 2010. "Family Ownership and Returns on Investment – Founders, Heirs, and External Managers," Ratio Working Papers, The Ratio Institute 148, The Ratio Institute.
  7. Michael Carney & Eric Gedajlovic & Sujit Sur, 2011. "Corporate governance and stakeholder conflict," Journal of Management and Governance, Springer, Springer, vol. 15(3), pages 483-507, August.
  8. Dlugosz, Jennifer & Fahlenbrach, Rudiger & Gompers, Paul & Metrick, Andrew, 2006. "Large blocks of stock: Prevalence, size, and measurement," Journal of Corporate Finance, Elsevier, Elsevier, vol. 12(3), pages 594-618, June.
  9. Mark Bagnoli & Hsin-Tsai Liu & Susan Watts, 2011. "Family firms, debtholder–shareholder agency costs and the use of covenants in private debt," Annals of Finance, Springer, Springer, vol. 7(4), pages 477-509, November.
  10. Emilio Barucci & Carlo Bianchi & Mirko Frediani, 2006. "CEO Turnover in the Italian Financial Market," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 127-154, November.
  11. Liu-Ching Tsai & Chaur-Shiuh Young & Hui-Wen Hsu, 2011. "Entrenched controlling shareholders and the performance consequences of corporate diversification in Taiwan," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 37(1), pages 105-126, July.
  12. Villalonga, Belen & Amit, Raphael, 2006. "How do family ownership, control and management affect firm value?," Journal of Financial Economics, Elsevier, Elsevier, vol. 80(2), pages 385-417, May.
  13. McGuire, Jean & Dow, Sandra & Ibrahim, Bakr, 2012. "All in the family? Social performance and corporate governance in the family firm," Journal of Business Research, Elsevier, Elsevier, vol. 65(11), pages 1643-1650.

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