Voting rights, corporate control, and firm performance

This dissertation investigates the impact of corporate control on firm performance of companies with dual class stock where voting rights are separated from cash flow rights. I first examine the issues concerning the decision to issue multiple classes of common stock with different voting rights. Firms often issue these shares to maintain a concentrated ownership structure, while at the same time raising new equity capital. I identify all Compustat listed companies with dual/multiple class common stock during the 1990–1999 time period using various databases including Compustat, CRSP, proxy statements, and 10-K filings. This database should be the most comprehensive sample of dual-class listed firms ever assembled. Using the collected data, I proceed to use logit models to examine which factors affect the likelihood that a firm will issue dual-class shares, and also to see if this relationship has changed over time. My principal findings are as follows: (1) There are strong industry effects in the likelihood of having dual class shares—printing, media, and motion picture firms are relatively more likely to have two classes of common stock while utilities are relatively less likely to do so. (2) Company age affects the likelihood of having a dual-class structure—younger firms are more likely to have two classes outstanding. (3) Firm size does not have any significant effect on the likelihood of having dual-class shares. (4) Firms with high stock-return volatility are relatively less likely to have a dual class structure. I then examine issues concerning the valuation and performance of dual class firms. I identify insider ownership in dual class firms in 1995 using various databases including proxy statements and 10-K filings. This database should be the most comprehensive ownership data sample of dual-class listed firms ever assembled. I compare valuation and performance of dual class firms and single class firms. I am able to investigate the effects of ownership of voting rights and ownership of cash flow rights on firm value separately. My principal findings are as follows: (1) overall dual class firms do not have a lower Tobin's Q than single class firms, (2) dual class firms that have both classes traded publicly have a lower Tobin's Q than single class firm and Tobin's Q increases as insider ownership of cash flow rights rises and declines as insider ownership of voting rights rises, (3) dual class firms that have one class of stock traded publicly do not have a lower Tobin's Q than single class firms, (4) within media industries, dual class firms do not have a lower Tobin's Q than single class firms while within non-media industries dual class firms have a lower Tobin's Q than single class firms, (5) there is no evidence that dual class firms underperform single class peers on certain performance measures, such as the Market-to-book equity ratio and the Price/Earnings ratio. There is some evidence that dual class firms underperform single class peers on some other performance measures, such as ROA, EBIT, and operating cash flow. Of these measures, firm performance rises with insider ownership of cash flow rights and decreases with insider ownership of voting rights, (6) investment-cash flow sensitivities increase with insider ownership of cash flow rights and decrease with insider ownership of voting rights. I explore the implications of these results for our understanding of ownership, control and value.