Dual class shares design in corporate firms: An endogenous governance model of the optimal “wedge”

A shareholding structure with different rights classes; namely, dual class shares (DCS), immediately raises the issue of the “wedge,” referring to the number of votes to give to the shares belonging to the superior right class. We use a model of two-sided optimal contract choices to define a possible equilibrium outcome. This study demonstrates that the wedge is not a symptom of agency conflicts, but an endogenous variable of an implicit contract equilibrium between a controller and investors. The study contributes to related theoretical literature and provides insights for understanding DCS development in certain industries, particularly those that are specific assets-intensive. Simulations of the model reveal that agency equilibrium is more difficult, or even impossible, to obtain in a one share–one vote framework. DCS design becomes the only valid framework to establish joint solutions. Simulations justify DCS systems with low voting ratios for low and medium specific assets-intensive firms. Justification of higher voting ratios of 10 or 20 votes per superior rights shares requires high specific assets-intensive firms or high value creation prospects. DCS design may be considered as an effective tool to optimize the agency contract between a controller and minor investors. Public regulators should consider this corporate structure as an additional optimization variable and keep it open instead of banning or limiting DCS frameworks.