Non-Voting Shares and the Value of Control: The Impact of Corporate Regulation in Italy

Abstract

Researchers have recently devoted their attention to the relationship between corporate and securities laws and the development of stock markets, claiming that high quality regulation, by reducing private benefits of control, stimulates broader and deeper capital markets. This paper tries to assess the impact of changes in Italian corporate law on private benefits during the twelve-year period 1989-2000. In this period, the Italian legislator introduced the mandatory bid rule (law 149/1992) and moved towards a higher protection of minority shareholders (through the legislative decree 58/1998). The paper focuses on these regulatory changes by analysing the evolution of the so-called voting premium, i.e. the price differential between voting and non-voting stocks, which might be regarded as a good proxy of private benefits of control. The analysis involves 80 publicly traded firms and supports the hypothesis that, along with the company's ownership structure, the liquidity and the fiscal treatment of non voting stocks as well as market factors (such as interest rates and traded volumes), the institutional framework matters. In particular, the estimation results show that the voting premium increased by about 2 percentage points after the introduction of the mandatory bid rule in 1992 and drop by about 7 percentage points following the enactment of the new corporate governance rules in 1998. The behaviour of voting and non-voting share prices during the period is thus consistent with the hypothesis that the expropriation of minority shareholders decreased after 1998.