The Dual-Class Share System and the Allocation of Control over Time

Henrik Lando

No 93-01, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: The choice facing an entrepreneur between issuing A-shares or B-shares to outside investors is studied. If the entrepreneur issues A-shares, control goes to the outside investors, whereas if the entrepreneur issues B-shares, he remains in control. Assuming no renegotiation at the point in time when control is exercised it is shown that neither the issue of A-shares nor the issue of B-shares is first-best, but that either may be second-best. It is further shown that when the entrepreneur decides between an A-share and a B-share issue, if no B-shares have been issued in the past, his incentives in the choice of issue are correct, and he will choose the optimal control allocation. However, if B-shares have already been issued, and issuing A-shares implies changing the control allocation, he has too little incentive to issue A-shares if existing B-shareholders cannot compensate him out of their gain. This may explain the widespread notion that closely held firms stay closely held for too long: the perception is that while in the beginning of the life-time of a firm it is often optimal that the entrepreneur controls since he has invested more resources in the firm than outside shareholders, as the firm grows and outside financial investment increases, a control shift becomes increasingly warranted but often does not take place. It is suggested that a time-limited B-share, which is used in some countries, e.g. Italy, may be useful in lowering the risk that a firm stays closely held for too long.

Keywords: dual-class share system; allocation of control over time; time-inconsistency (search for similar items in EconPapers)
Pages: 13 pages
Date: 1993-02
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:9301

Access Statistics for this paper

More papers in Discussion Papers from University of Copenhagen. Department of Economics Oester Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Hoffmann ().