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Unifications of Dual-Class Shares in Germany Empirical Evidence on the Effects ofRelated Changes in Ownership Structure, Market Value, and Bid-Ask Spreadsnce from the German Stock Market

Listed author(s):
  • Olaf Ehrhardt

    (Universtity of Applied Sciences Straslund und Humboldt University of Berlin)

  • Jan Kuklinski

    (University of Witten/Herdecke)

  • Eric Nowak

    (University of Lugano)

Registered author(s):

    This paper examines the unification of non-voting preference shares into a one share-one vote structure using a sample of all German dual-class companies from 1987 until 2003. We test several hypotheses with regard to the reasons for the abolition of preference shares. First, as the separation of ownership and control is viewed as a means of keeping control over a firm, a detailed analysis of changes in the ownership structure of firms abolishing their preference shares is performed. Indeed, family firms losing the majority of control by unifying their share classes seem to restrain from this step by selling controlling blocks before the unification. Second, dualclass firms may comprise higher agency costs due to the violation of the one share-one vote rule and, thus, face higher costs of equity capital. We apply two methods for estimating changes in the cost of capital of unifying firms : (i) we perform an event study to examine the market reaction to the announcement of share class unifications and (ii) we investigate bid-ask spreads before and after the unification computed from intraday trading data to analyze liquidity effects on the cost of capital associated with the unification. In sum, the unification of dual-class preference shares into single -class voting shares seems to be strictly shareholder value increasing. Dual-class firms seem to be able to significantly reduce their cost of capital through unification, because of increases in firm value as well as a substantial reduction in bid-ask spreads.

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    Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 06-12.

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    Length: 58 pages
    Date of creation: Oct 2004
    Date of revision: Nov 2005
    Handle: RePEc:chf:rpseri:rp0612
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