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Dual-class share structure and firm risks

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  • Kim, Soohyung

Abstract

While costs associated with dual-class share ownership structures are widely documented, the benefits are seldom studied in the literature. We present evidence that a dual-class share structure promotes corporate risk-taking by providing insulation to insiders, such as management and controlling shareholders, from short-term market pressure. We then show that dual-class shares increase the market valuation of firms with high corporate risks, in contrast to the finding in the literature that a dual-class share structure is associated with lower valuation and performance. To provide a possible channel through which dual-class firms can increase corporate risk-taking, we find that dual-class firms are more likely to engage in mergers and acquisitions (M&As), especially non-diversifying M&As. We address endogeneity concerns by using a sample of share unifications and show that when dual-class firms change to single-class status, their corporate risks decrease.

Suggested Citation

  • Kim, Soohyung, 2023. "Dual-class share structure and firm risks," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:pacfin:v:80:y:2023:i:c:s0927538x23001506
    DOI: 10.1016/j.pacfin.2023.102084
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    More about this item

    Keywords

    Dual-class shares; Business segments; Cash flow volatility; Earnings volatility; Investment opportunities; Mergers and acquisitions;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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