2015 GCGC

5-6 June 2015

Ownership, Investment and Governance: The Costs and Benefits of Dual Class Shares


Ronald Masulis

Scientia Professor in Finance, University of New South Wales  


Li Jin

Visiting Professor of Emerging Market Finance


In this paper we show that dual-class shares can be an answer to agency conflicts rather than a result of agency conflicts. When a firm issues voting shares to raise funds, it increases the risk that manager-controlling shareholder could lose control of the firm and lose the associated private benefits. Thus, the incumbent may be willing to forgo positive NPV investments to maximize his overall welfare. Non-voting shares allow a firm to raise funds without diluting manager’s control rights; hence, it can alleviate the underinvestment problem .But use of non-voting shares dilutes dividends and facilitates entrenchment, reducing value-enhancing takeover bids. We obtain conditions under which the benefit of using non-voting shares outweighs its costs. We integrate the dual-class decision into the rich body of research on capital structure and underinvestment, and show that dual-class structures can be a solution to an agency driven underinvestment problem.

Visit our partner site :footer-logo-new

Designed By Astwood


We're not around right now. But you can send us an email and we'll get back to you, asap.


Log in with your credentials

Forgot your details?