Managerial bonding and stock liquidity: An analysis of dual-class firms

Given the decision to create a second class of stock through a dual-class structure, we propose that management is more (less) likely to create a liquid secondary market for both classes of shares the lower (higher) its willingness to tie its personal wealth to firm performance. If market makers rec...

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Bibliographic Details
Published in:Journal of economics and finance 2004-04, Vol.28 (1), p.117-131
Main Authors: Boehmer, Ekkehart, Sanger, Gary C., Varshney, Sanjay B.
Format: Article
Language:English
Subjects:
Initial public offerings
Liquidity
Recapitalization
Securities industry
Shareholder voting
Stock offerings
Stockholders
Studies
Voting rights
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Summary:Given the decision to create a second class of stock through a dual-class structure, we propose that management is more (less) likely to create a liquid secondary market for both classes of shares the lower (higher) its willingness to tie its personal wealth to firm performance. If market makers recognize this relation, they should assign a higher likelihood to trades motivated by superior information in shares of firms that list both classes of stock and a lower likelihood for firms that list only one class of stock pursuant to recapitalization. Additionally, they should assign a lower likelihood to trades motivated by superior information in shares of IPOs that choose a dual-class structure and list only one class relative to IPOs that remain single-class. Our empirical tests based on IPOs and recaps between 1985 and 1988 provide support for these propositions. [PUBLICATION ABSTRACT]
ISSN:1055-0925
1938-9744
DOI:10.1007/BF02761459