Dual‐Class Shares and Firm Valuation: Market‐Wide Evidence from Regulatory Events

Abstract

The motivations and impacts of dual‐class voting structures are controversial and have been extensively studied. In this paper, we apply a new methodology to study the impact of dual‐class voting that avoids the endogeneity issues of other studies. Specifically, we rely on market‐wide stock market reactions to multiple regulatory events to show that risk‐adjusted stock returns rise (fall) in response to events that decrease (increase) the probability of adopting dual‐class shares. Across firms, this reaction varies systematically and sensibly with proxies for managerial flexibility or entrenchment and overall suggests that investors favor dual‐class shares in research‐intensive and well‐governed firms. The improved method of analysis strengthens the results of prior studies and reconciles the theories of managerial flexibility versus entrenchment. We conclude by arguing that a one‐size‐fits‐all policy that bans dual‐class shares would reduce research output, firm value, and profitability.