Dual-Class Shares, External Financing Needs, and Firm Performance
Forthcoming Journal of Management and Governance
42 Pages Posted: 1 Mar 2011 Last revised: 1 Nov 2023
Date Written: February 27, 2015
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.
Keywords: Corporate Governance, Dual-class Shares, Agency Theory, Stewardship Theory, Shareholder Value, Natural Experiment
JEL Classification: G30, G38, K22
Suggested Citation: Suggested Citation
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