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Dual-class shares, external financing needs, and firm performance

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  • Stephan Nüesch

    () (Westfälische-Wilhelms University of Münster)

Abstract

Abstract Whereas the agency theory predicts that dual-class shares decrease firm performance, the stewardship theory predicts that dual-class shares increase firm performance. The cumulative findings on the performance consequences of dual-class shares have been weak and/or inconclusive. Because endogeneity is a constant challenge in empirical corporate governance studies, this study uses a unique law change in Switzerland as a source of exogenous variation in the fraction of firms with dual-class shares. Controlling for firm fixed effects and time-varying confounders, we find that dual-class shares neither harm nor benefit firm performance on average. However, dual-class shares increase firm performance if the firm requires external finance and dual-class shares decrease firm performance if the firm does not require external finance. External financing needs mitigate the agency costs between controlling and minority shareholders and create a context in which dual-class shares facilitate firm-specific investments instead of private perquisites. The study’s results have both managerial and policy implications.

Suggested Citation

  • Stephan Nüesch, 2016. "Dual-class shares, external financing needs, and firm performance," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(3), pages 525-551, September.
  • Handle: RePEc:kap:jmgtgv:v:20:y:2016:i:3:d:10.1007_s10997-015-9313-5
    DOI: 10.1007/s10997-015-9313-5
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    More about this item

    Keywords

    Corporate governance; Dual-class shares; Agency theory; Stewardship theory; Shareholder value; Natural experiment;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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