Dual‐Class Companies: Do Inferior‐Voting Shares Make Inferior Investments?

A dual‐class share structure allows managers or original owners to retain control of a firm, while providing public equity financing. In the U.S., a firm generally issues superior‐voting shares to managers or original owners, and inferior‐voting shares to the public. As a result of the separation of control and risk bearing, the potential for agency problems exists. Theory predicts and some evidence shows that the use of a dual‐class share structure leads to a lower firm valuation than would otherwise exist. However, theory also suggests that separation of control and risk bearing might be desirable in some situations, since it allows managers to make long‐term investments without fear of a hostile takeover. Thus, a dualclass share structure could result in superior performance. This study addresses the question that confronts investors with respect to dual‐class firms: “Are inferior‐voting shares inferior investments?” Specifically, this research investigates the stock performance of companies that have dual‐class shares. Overall, results show that investors in inferior‐voting shares do not earn abnormally low risk‐adjusted returns. Investors in non‐IPO inferior‐voting shares earn positive abnormal risk‐adjusted returns.