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

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  • Cheng, Xiaoyan
  • Mpundu, Heminigild
  • Wan, Huishan

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.

Suggested Citation

  • Cheng, Xiaoyan & Mpundu, Heminigild & Wan, Huishan, 2020. "Investment efficiency: Dual-class vs. Single-class firms," Global Finance Journal, Elsevier, vol. 45(C).
    • Handle: RePEc:eee:glofin:v:45:y:2020:i:c:s1044028318302631
    DOI: 10.1016/j.gfj.2019.100477
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    More about this item

    Keywords

    Dual-class; Investment efficiency; Overinvestment; Underinvestment; Agency theory; Stewardship theory;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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