Unifications of Dual-Class Shares in Germany - First Empirical Evidence on Liquidity Effects of Share Class Unifications

61 Pages Posted: 6 Mar 2005 Last revised: 1 Nov 2023

See all articles by Olaf Ehrhardt

Olaf Ehrhardt

University of Applied Sciences Stralsund

Eric Nowak

Swiss Finance Institute; Universita della Svizzera italiana (USI Lugano)

Jan Kuklinski

University of Witten/Herdecke

Abstract

This paper examines the unification of non-voting preference shares into a one share-one vote structure using a sample of all German dual-class companies from 1987 until 2003. We test several hypotheses with regard to the reasons for the abolition of preference shares. First, as the separation of ownership and control is viewed as a means of keeping control over a firm, a detailed analysis of changes in the ownership structure of firms abolishing their preference shares is performed. Indeed, family firms losing the majority of control by unifying their share classes seem to restrain from this step by selling controlling blocks before the unification. Second, dualclass firms may comprise higher agency costs due to the violation of the one share-one vote rule and, thus, face higher costs of equity capital. We apply two methods for estimating changes in the cost of capital of unifying firms : (i) we perform an event study to examine the market reaction to the announcement of share class unifications and (ii) we investigate bid-ask spreads before and after the unification computed from intraday trading data to analyze liquidity effects on the cost of capital associated with the unification. In sum, the unification of dual-class preference shares into single-class voting shares seems to be strictly shareholder value increasing. Dual-class firms seem to be able to significantly reduce their cost of capital through unification, because of increases in firm value as well as a substantial reduction in bid-ask spreads.

Keywords: dual-class shares, share class unification, cost of capital, event study, announcement effects, bid -ask spreads, liquidity

JEL Classification: G32, G34

Suggested Citation

Ehrhardt, Olaf and Nowak, Eric and Kuklinski, Jan, Unifications of Dual-Class Shares in Germany - First Empirical Evidence on Liquidity Effects of Share Class Unifications. Swiss Finance Institute Research Paper No. 06-12, 21st Australasian Finance and Banking Conference 2008 Paper, Available at SSRN: https://ssrn.com/abstract=677000 or http://dx.doi.org/10.2139/ssrn.677000

Olaf Ehrhardt

University of Applied Sciences Stralsund ( email )

Zur Schwedenschanze 15
D-18435 Stralsund
United States

Eric Nowak (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Universita della Svizzera italiana (USI Lugano) ( email )

Jan Kuklinski

University of Witten/Herdecke ( email )

Alfred-Herrhausen-Straße 50
D-58448 Witten
Germany

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