Institutional ownership of dual-class companies

• Published in: Journal of financial economic policy 2021-03, Vol.13 (2), p.206-222
• Main Authors: Burson, Jonathan J, Jensen, Marlin R.H
• Format: Article
• Language: English
• Subjects: Boards of directors; Companies; Corporate governance; Family owned businesses; Founders; Going public; Governance; Initial public offerings; Institutional investments; Investors; New stock market listings; Ownership; Power; Safeguards; Social classes; Social networks; Social structure; Stock exchanges; Stockholders; Success; Sunset provisions; Voting rights
• ISSN: 1757-6385; 1757-6393
• DOI: 10.1108/JFEP-04-2020-0061

Purpose This study aims to examine institutional ownership of companies that go public with dual-class share structures. Design/methodology/approach Several recent studies have discussed the potential advantages and disadvantages of the dual-class structure, which allows founders and insiders to maintain control of the firms they created through superior voting rights. Institutional investors oppose the dual-class structure, arguing that inferior voting rights make it difficult to respond to poor governance or performance. Previous research has shown the early value-added to the dual-class firm declines through time. This study examines institutional ownership of dual-class companies through time and compares institutional investments in initial public offerings with perpetual superior-class structures versus those with provisions to sunset those shares to one-share, one-vote structures. Findings Evidence suggests that institutional investors view perpetual dual-class structures as potentially riskier in terms of poor governance or performance and prefer dual-class companies with sunset provisions. Originality/value This study suggests that founders and insiders should consider either the dual-class structure with a sunset provision or if they choose the perpetual dual-class, it should include some type of event-driven safeguards.