Working Paper: NBER ID: w10240
Authors: Paul Gompers; Joy Ishii; Andrew Metrick
Abstract: Dual-class common stock allows for the separation of voting rights and cash flow rights across the different classes of equity. We construct a large sample of dual-class firms in the United States and analyze the relationships of insider's cash flow rights and voting rights with firm value, performance, and investment behavior. We find that relationship of firm value to cash flow rights is positive and concave and the relationship to voting rights is negative and convex. Identical quadratic relationships are found for the respective ownership variables with sales growth, capital expenditures, and the combination of R&D and advertising. Our evidence is consistent with an entrenchment effect of voting control that leads managers to underinvest and an incentive effect of cash flow ownership that induces managers to pursue more aggressive strategies.
Keywords: No keywords provided
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow ownership (G32) | firm value (G32) |
| voting ownership (K16) | firm value (G32) |
| cash flow ownership (G32) | sales growth (O49) |
| voting ownership (K16) | sales growth (O49) |
| cash flow ownership (G32) | capital expenditures (G31) |
| voting ownership (K16) | capital expenditures (G31) |
| cash flow ownership (G32) | combined R&D and advertising expenditures (O32) |
| voting ownership (K16) | combined R&D and advertising expenditures (O32) |
| cash flow ownership (G32) | investment strategies (G11) |
| high voting rights (K16) | underinvestment by managers (G31) |