Timing and Wealth Effects of German Dual Class Stock Unifications

Abstract

This paper studies the reasons and the costs of separating ownership from control by analyzing the decision of German dual class firms to consolidate their share structure from dual to single class equity between 1990 and 2001. We find that the firm value increases significantly by an average 4% on the announcement day. A significant part of the variation in abnormal returns can be explained by the ownership structure and by changes in liquidity. A logit analysis of the unification decision yields that firms are more likely to unify if their controlling shareholder loses only little voting power in a stock unification. Also, firms that are financially constrained are more likely to abolish dual class shares; these firms often issue additional shares after the stock unification.

A previous version of this paper was circulated via SSRN under the title When do Firms Abolish Dual-Class Stocks?

Keywords: capital structure, entrenchment, financial constraints, liquidity, ownership structure

JEL Classification: G32, G34