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Investment efficiency: Dual-class vs. Single-class firms

Xiaoyan Cheng, Heminigild Mpundu and Huishan Wan

Global Finance Journal, 2020, vol. 45, issue C

Abstract: This study examines the effects of a dual-class structure on investment efficiency. Agency theory suggests that a dual-class structure exacerbates agency problems, leading to under- or overinvestment, but another view posits that the dual-class structure insulates managers from the pressure of the marketplace or activist investors seeking short-term profits. We find that dual-class firms invest more efficiently than single-class peers. This effect is more pronounced among firms with less transparent investments such as R&D. Our findings are robust to a propensity score matching approach and a setting where single-class firms recapitalize with dual-class shares. Furthermore, we find that among firms most at risk of overinvestment, dual-class firms have higher future accounting profitability and less volatile future returns.

Keywords: Dual-class; Investment efficiency; Overinvestment; Underinvestment; Agency theory; Stewardship theory (search for similar items in EconPapers)
JEL-codes: G31 M41 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.gfj.2019.100477

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