Incentives vs. Control: An Analysis of U.S. Dual-Class Companies

Paul Gompers, Joy Ishii and Andrew Metrick

No 10240, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G3 (search for similar items in EconPapers)
Date: 2004-01
New Economics Papers: this item is included in nep-cfn
Note: CF AP
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Citations: View citations in EconPapers (21)

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