Dual-class share structure and financial constraints

Purpose - This paper aims to examine the impact of dual-class share structures, where share structure is measured by the existence of a dual-class structure and also by excess voting rights and the proximity of the superior class shareholders in such structures, on financial constraints. Design/methodology/approach - The study applies regression analyses to a sample of 2,466 observations on non-financial US firms over the period 2002–2018. The methods include regression with industry and year fixed effects, “propensity score matching” approach to match the dual-class firms with non-dual class firms and alternative measures of financial constraints. Findings - The result shows that irrespective of how dual-class share structure is measured, it increases the level of financial constraints, except where dual-class share structure is measured by the proximity of superior class shareholders. Among the additional tests, the HM index has been used as a measure of financial constraints, and the findings show that the impact of dual-class structures on financial constraints appears to be driven by their effect on debt constraints. Finally, the findings are robust when the authors address endogeneity issues and remain consistent when the authors use alternative measures and tests. Practical implications - The study has important implications for investors, regulators and policymakers, as it could help an understanding of the effect of the potential for conflict between superior class shareholders and other shareholders. Originality/value - The results from the study support earlier literature on the impact of dual-class share structure on financial constraints. However, the study also provides new evidence on the different dimensions of dual-class share structure and financial constraints. Furthermore, the hand-collected data set on dual-class firms and the values of their voting wedge and the proximity of superior class shareholders may be useful to other researchers.