Dual-class stock enables a company’s controller to retain voting control of a corporation while holding a disproportionately lower level of the corporation’s cash-flow rights. Dual-class stock has led a tortured life in the US. Between institutional investor derision and the exclusion or restriction of dual-class stock from certain indices, one may assume that dual-class structure must be harmful to outside stockholders. However, in this article, the existing empirical evidence on US dual-class stock will be reassessed by contrasting studies that use different measures of performance. It will be shown that although dual-class firms are generally valued less than similar one-share, one-vote firms, they perform as well as, and, in many cases, outperform, such firms from the perspective of operating performance and stock returns. When it comes to dual-class stock, more than meets the eye, and a presumption that dual-class stock is harmful for outside stockholders should not guide policy formulation.
{"title":"More than Meets the Eye: Reassessing the Empirical Evidence on US Dual-Class Stock","authors":"Bobby V. Reddy","doi":"10.2139/ssrn.3554428","DOIUrl":"https://doi.org/10.2139/ssrn.3554428","url":null,"abstract":"Dual-class stock enables a company’s controller to retain voting control of a corporation while holding a disproportionately lower level of the corporation’s cash-flow rights. Dual-class stock has led a tortured life in the US. Between institutional investor derision and the exclusion or restriction of dual-class stock from certain indices, one may assume that dual-class structure must be harmful to outside stockholders. However, in this article, the existing empirical evidence on US dual-class stock will be reassessed by contrasting studies that use different measures of performance. It will be shown that although dual-class firms are generally valued less than similar one-share, one-vote firms, they perform as well as, and, in many cases, outperform, such firms from the perspective of operating performance and stock returns. When it comes to dual-class stock, more than meets the eye, and a presumption that dual-class stock is harmful for outside stockholders should not guide policy formulation.","PeriodicalId":269711,"journal":{"name":"CGN: Firms Separating Cash Flow & Voting Rights: Dual Class & Pyramids (Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125596153","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Cash holding is one of company's internal funding sources that might be used for investment purposes. In fact, corporate investment funding policy may affect the magnitude of the cash holding because management must decide proper sources of the funds, i.e. internal and external priorities, and which sources will be taken first. This study aims at testing whether diversification strategies may reduce or increase the tendency of companies to save cashes in a company, either a financially-constrained, financially non-constrained or all of them. The sample taken in this study is manufacturing companies listed at the Indonesian Stock Exchange during 2006-2011 . They are selected by using a purposive sampling. Analytical techniques applied are the data analysis panel with the Ordinary LeastSquared (OLS) approach. The results indicate that diversification strategies have a negative and insignificant influence to the change of cash holding in a company. Companies tend to keep cash holding in response to a lower positive cash flow in a diversified company. The influence is stronger on a constrained company than a financially non-constrained one. The cash flows have a positive influence on cash holding. The trend is stronger on financiallyconstrained corporations. Meanwhile, market-to-book value of assets have an insignificant and positive influence to cash holding company. These influences also apply to financially non-constrained ones. However, the influence of market-to-book value of company assets in financially non-constrained companies cannot not be determined as they have no systematic patterns on either debt ratio, payout ratio, book-to-market asset ratio or the size of assets
{"title":"Corporate Diversification and Cash Holding","authors":"K. Purnamasari, N. Fitdiarini","doi":"10.2139/ssrn.3791161","DOIUrl":"https://doi.org/10.2139/ssrn.3791161","url":null,"abstract":"Cash holding is one of company's internal funding sources that might be used for investment purposes. In fact, corporate investment funding policy may affect the magnitude of the cash holding because management must decide proper sources of the funds, i.e. internal and external priorities, and which sources will be taken first. This study aims at testing whether diversification strategies may reduce or increase the tendency of companies to save cashes in a company, either a financially-constrained, financially non-constrained or all of them. The sample taken in this study is manufacturing companies listed at the Indonesian Stock Exchange during 2006-2011 . They are selected by using a purposive sampling. Analytical techniques applied are the data analysis panel with the Ordinary LeastSquared (OLS) approach. The results indicate that diversification strategies have a negative and insignificant influence to the change of cash holding in a company. Companies tend to keep cash holding in response to a lower positive cash flow in a diversified company. The influence is stronger on a constrained company than a financially non-constrained one. The cash flows have a positive influence on cash holding. The trend is stronger on financiallyconstrained corporations. Meanwhile, market-to-book value of assets have an insignificant and positive influence to cash holding company. These influences also apply to financially non-constrained ones. However, the influence of market-to-book value of company assets in financially non-constrained companies cannot not be determined as they have no systematic patterns on either debt ratio, payout ratio, book-to-market asset ratio or the size of assets","PeriodicalId":269711,"journal":{"name":"CGN: Firms Separating Cash Flow & Voting Rights: Dual Class & Pyramids (Topic)","volume":"71 2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-02-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132017753","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Irfah Najihah Basir Malan, N. Salamudin, Noryati Ahmad
The objective of this study is to ascertain whether the higher level of cash flow rights (CFR) in the hand of ultimate owner help to improve the value relevance of earnings information in pyramid structure firms. The separation of cash flow rights (CFR) and control rights (CR) in pyramid structure firms has entrenched the ultimate owner and provide them with opportunities to manipulate earnings information, which in turn reduce the value relevance of the earnings information reported. This study hypothesizes that the higher level of cash flow rights (CFR) in pyramid structure identified will help to reduce the agency problem between ultimate owner and minority shareholder by reducing the opportunity of ultimate owner to manipulate earnings information, which will increase the value relevance of earnings information in pyramid structure firms. The sample of this study consists of pyramid structure firms in Malaysia for the period of 1990 to 2010, where the identity of the ultimate owner is pyramidal ownership. Earnings return model with the interaction between earnings information reported by pyramid structure firms and the level of cash flow rights (CFR) of ultimate owner is provided to show the effect on the earnings-return relationship in an attempt to measure the value relevance of earnings information reported. Positive earnings-return relationship and higher adjusted R2 indicate that earnings information is value relevant and vice-versa. Using Panel Generalized Least Square (GLS) estimation, the results show that the presence of higher level of cash flow rights (CFR) in pyramid structure is significant to minimize and mitigate the negative effects of the structure based on higher adjusted R2 reported within positive earnings-return relationship.
{"title":"Level of Cash Flow Rights of the Ultimate Owner on Value Relevance of Earnings Information of Pyramid Structure Firms","authors":"Irfah Najihah Basir Malan, N. Salamudin, Noryati Ahmad","doi":"10.2139/ssrn.2197653","DOIUrl":"https://doi.org/10.2139/ssrn.2197653","url":null,"abstract":"The objective of this study is to ascertain whether the higher level of cash flow rights (CFR) in the hand of ultimate owner help to improve the value relevance of earnings information in pyramid structure firms. The separation of cash flow rights (CFR) and control rights (CR) in pyramid structure firms has entrenched the ultimate owner and provide them with opportunities to manipulate earnings information, which in turn reduce the value relevance of the earnings information reported. This study hypothesizes that the higher level of cash flow rights (CFR) in pyramid structure identified will help to reduce the agency problem between ultimate owner and minority shareholder by reducing the opportunity of ultimate owner to manipulate earnings information, which will increase the value relevance of earnings information in pyramid structure firms. The sample of this study consists of pyramid structure firms in Malaysia for the period of 1990 to 2010, where the identity of the ultimate owner is pyramidal ownership. Earnings return model with the interaction between earnings information reported by pyramid structure firms and the level of cash flow rights (CFR) of ultimate owner is provided to show the effect on the earnings-return relationship in an attempt to measure the value relevance of earnings information reported. Positive earnings-return relationship and higher adjusted R2 indicate that earnings information is value relevant and vice-versa. Using Panel Generalized Least Square (GLS) estimation, the results show that the presence of higher level of cash flow rights (CFR) in pyramid structure is significant to minimize and mitigate the negative effects of the structure based on higher adjusted R2 reported within positive earnings-return relationship.","PeriodicalId":269711,"journal":{"name":"CGN: Firms Separating Cash Flow & Voting Rights: Dual Class & Pyramids (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130972774","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Several recent studies provide evidence that dual class firms are discounted compared to similar single class companies due to the extraction of private benefits and agency costs. However, the channels through which private benefits are extracted have not been fully explored in the literature. With a propensity score matched sample of S&P 1500 dual class and single class companies with concentrated control, this paper investigates the link between the observed valuation discount of dual class companies and three channels through which private benefits can be extracted: excess executive compensation, excess capital expenditure and excess cash holdings. This research provides evidence that excess compensation and excess cash holdings of dual class companies are directly related to the discount that investors apply to the value of dual companies. The findings indicate that excess compensation is paid to executives in dual class companies and the degree of excess compensation is greatest for executives who are family members. The results also show that dual class firms retain more cash compared to single class concentrated control firms. However, capital expenditure is not statistically significant in explaining the dual class discount.
{"title":"To Extract or Not to Extract: An Examination of the Dual Class Discount, and the Channels of Extraction of Private Benefits","authors":"Vishaal Baulkaran, Ben Amoako-Adu, Brian F. Smith","doi":"10.2139/ssrn.1894910","DOIUrl":"https://doi.org/10.2139/ssrn.1894910","url":null,"abstract":"Several recent studies provide evidence that dual class firms are discounted compared to similar single class companies due to the extraction of private benefits and agency costs. However, the channels through which private benefits are extracted have not been fully explored in the literature. With a propensity score matched sample of S&P 1500 dual class and single class companies with concentrated control, this paper investigates the link between the observed valuation discount of dual class companies and three channels through which private benefits can be extracted: excess executive compensation, excess capital expenditure and excess cash holdings. This research provides evidence that excess compensation and excess cash holdings of dual class companies are directly related to the discount that investors apply to the value of dual companies. The findings indicate that excess compensation is paid to executives in dual class companies and the degree of excess compensation is greatest for executives who are family members. The results also show that dual class firms retain more cash compared to single class concentrated control firms. However, capital expenditure is not statistically significant in explaining the dual class discount.","PeriodicalId":269711,"journal":{"name":"CGN: Firms Separating Cash Flow & Voting Rights: Dual Class & Pyramids (Topic)","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-07-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131799452","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Literatures of corporate governance claim that expropriation by controlling owner towards the listed firm emerges when separation of cash flow and control rights exist, and that the separation emerges when dual class shares or pyramiding corporate structures exist. In China, dual class share and pyramiding coexisted in listed companies until the dual share reform was implemented since 2005. Exploiting this good exogenous change in the institution, which only resolve dual class share structure and pyramids remained, this paper tested how much the pyramiding allow the controlling owner to expropriate listed firm. Results show that: the larger control right and the Smaller cash flow right ear, size of expropriation becomes bigger; the expropriation is apparent For state controlled listed companies, though private owned firms do not. This is because level of control right ratio is higher than private though state firms's control-cash slow right ratio is Larger than a private one. While the dual class share reform weakened the power to expropriate, Separation still remains, and generates expropriation. Structural estimation shows the size of Expropriation to be 7 to 8 per cent of total assets at the main. If the one share one vote principle were to be realized, asset inflation could be reduced by 13 percent.
{"title":"Control Rights, Pyramids and Expropriation of State-Owned Listed Enterprises: Evidence from the Dual Class Share Reform in China","authors":"Mariko Watanabe","doi":"10.2139/ssrn.2570776","DOIUrl":"https://doi.org/10.2139/ssrn.2570776","url":null,"abstract":"Literatures of corporate governance claim that expropriation by controlling owner towards the listed firm emerges when separation of cash flow and control rights exist, and that the separation emerges when dual class shares or pyramiding corporate structures exist. In China, dual class share and pyramiding coexisted in listed companies until the dual share reform was implemented since 2005. Exploiting this good exogenous change in the institution, which only resolve dual class share structure and pyramids remained, this paper tested how much the pyramiding allow the controlling owner to expropriate listed firm. Results show that: the larger control right and the Smaller cash flow right ear, size of expropriation becomes bigger; the expropriation is apparent For state controlled listed companies, though private owned firms do not. This is because level of control right ratio is higher than private though state firms's control-cash slow right ratio is Larger than a private one. While the dual class share reform weakened the power to expropriate, Separation still remains, and generates expropriation. Structural estimation shows the size of Expropriation to be 7 to 8 per cent of total assets at the main. If the one share one vote principle were to be realized, asset inflation could be reduced by 13 percent.","PeriodicalId":269711,"journal":{"name":"CGN: Firms Separating Cash Flow & Voting Rights: Dual Class & Pyramids (Topic)","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127888184","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze the effect of dual-class structures on shareholder value of Swiss companies. Switzerland presents an ideal setting for studying the deviations from the one share-one vote rule due to the traditional popularity of multiple share classes. After accounting for self-selection into dual or single share category, we find strong positive effect of dual-class shares on firm value. Analysis of acquisition activities reveals that dual-class firms do not perform worse in acquisitions; contrary to that, in the recent years or among firms with low and moderate market-to-book values the returns to acquisitions are improved due to the dual-class structure.
{"title":"The Value of Dual-Class Shares in Switzerland","authors":"H. VON DER CRONE, Evgeny Plaksen","doi":"10.2139/ssrn.1542780","DOIUrl":"https://doi.org/10.2139/ssrn.1542780","url":null,"abstract":"We analyze the effect of dual-class structures on shareholder value of Swiss companies. Switzerland presents an ideal setting for studying the deviations from the one share-one vote rule due to the traditional popularity of multiple share classes. After accounting for self-selection into dual or single share category, we find strong positive effect of dual-class shares on firm value. Analysis of acquisition activities reveals that dual-class firms do not perform worse in acquisitions; contrary to that, in the recent years or among firms with low and moderate market-to-book values the returns to acquisitions are improved due to the dual-class structure.","PeriodicalId":269711,"journal":{"name":"CGN: Firms Separating Cash Flow & Voting Rights: Dual Class & Pyramids (Topic)","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129950858","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Dual-class shares have presented a challenge to standard valuation theories, and yet they make up a significant share of the trading volume and market capitalization in a significant number of the world's largest stock exchanges. This descriptive study overviews the incidence of dual-class firms in the 46 largest national stock markets, and described their voting and cash-flow rights in detail. The security-voting structure (deviations from one share one vote) of dual-class firms is examined in a comparative cross-country perspective - the higher-voting class is noted to concentrate majority or super majority control virtually in all cases. The national regulatory environment for multiple share classes is a hotly-debated topic, on which the study sheds systematic light. Predictably, the ownership of dual class firms is significantly more concentrated than that of their single-class counterparts, and in most cases involves majority voting power and the absence of smaller sizable voting blocks. The bulk of the evidence is consistent with the hypothesis that dominant owners do not prefer to share control. Owners are mostly families, who also participate actively in the management and supervision of the firm.
{"title":"How to Dominate a Firm With Valuable Control? Dual Class Firms Around the World: Regulation, Security-Voting Structure, and Ownership Patterns","authors":"Tatiana Nenova","doi":"10.2139/ssrn.1017603","DOIUrl":"https://doi.org/10.2139/ssrn.1017603","url":null,"abstract":"Dual-class shares have presented a challenge to standard valuation theories, and yet they make up a significant share of the trading volume and market capitalization in a significant number of the world's largest stock exchanges. This descriptive study overviews the incidence of dual-class firms in the 46 largest national stock markets, and described their voting and cash-flow rights in detail. The security-voting structure (deviations from one share one vote) of dual-class firms is examined in a comparative cross-country perspective - the higher-voting class is noted to concentrate majority or super majority control virtually in all cases. The national regulatory environment for multiple share classes is a hotly-debated topic, on which the study sheds systematic light. Predictably, the ownership of dual class firms is significantly more concentrated than that of their single-class counterparts, and in most cases involves majority voting power and the absence of smaller sizable voting blocks. The bulk of the evidence is consistent with the hypothesis that dominant owners do not prefer to share control. Owners are mostly families, who also participate actively in the management and supervision of the firm.","PeriodicalId":269711,"journal":{"name":"CGN: Firms Separating Cash Flow & Voting Rights: Dual Class & Pyramids (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2001-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125393473","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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