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.(This abstract was borrowed from another version of this item.)