Ownership, Investment and Governance: The Costs and Benefits of Dual Class Shares

Abstract

We show that dual-class shares can be a solution to agency conflicts rather than a result of agency conflicts. When firms with a controlling shareholder issue voting shares to fund projects, the risk of losing control rises, which can threaten the controller’s private benefits. Thus, incumbents may forgo positive NPV investments to maintain control. Non-voting shares allow firms to fund projects without diluting an incumbent’s voting rights; which alleviates the underinvestment problem. But, issuing non-voting shares dilutes dividends per share and facilitates entrenchment, reducing value-enhancing takeover bids. We derive conditions when the benefits from using non-voting shares outweigh its costs.

Keywords: Blockholders, Controlling shareholders, Dual-class shares, Hostile takeovers, Ownership structure, Private benefits of control, Non-voting shares, Shareholder welfare, Takeover defenses, Underinvestment, Voting rights

JEL Classification: G32, G34, G38, K20