Managerial bonding and stock liquidity: An analysis of dual-class firms

Ekkehart Boehmer, Gary Sanger () and Sanjay Varshney ()

Journal of Economics and Finance, 2004, vol. 28, issue 1, 117-131

Abstract: Given the decision to create a second class of stock through a dual-class structure, we propose that management is more (less) likely to create a liquid secondary market for both classes of shares the lower (higher) its willingness to tie its personal wealth to firm performance. If market makers recognize this relation, they should assign a higher likelihood to trades motivated by superior information in shares of firms that list both classes of stock and a lower likelihood for firms that list only one class of stock pursuant to recapitalization. Additionally, they should assign a lower likelihood to trades motivated by superior information in shares of IPOs that choose a dual-class structure and list only one class relative to IPOs that remain single-class. Our empirical tests based on IPOS and recaps between 1985 and 1988 provide support for these propositions. Copyright Academy of Economics and Finance 2004

Date: 2004
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DOI: 10.1007/BF02761459

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