Measuring Private Benefits of Control from the Returns of Voting and Non-Voting Shares

Abstract

This paper proposes a new measure for estimating private benefits of control from data on dual-class companies. The proposed measure is the average return difference between non-voting shares and voting shares. We develop a theoretical framework that allows us to compare this new measure with the traditional measure, the relative price difference between voting and non-voting shares. It turns out that the price difference - but not the return difference - suffers from two sources of bias. The price difference will underestimate the value of control for firms which (1) pay higher dividends on non-voting shares than on voting shares or (2) are expected to discontinue their dual-class structure soon. We apply the two measures to data on German and US dual class companies and demonstrate that the price difference severely underestimates the value of control in the US relative to Germany. We conclude that private benefits of control do not differ significantly between these two countries.

JEL Classification: G30, G34