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J Manag Gov (2016) 20:525551
DOI 10.1007/s10997-015-9313-5
Stephan Nesch1
Published online: 17 March 2015 Springer Science+Business Media New York 2015
Abstract Whereas the agency theory predicts that dual-class shares decrease rm performance, the stewardship theory predicts that dual-class shares increase rm performance. The cumulative ndings on the performance consequences of dual-class shares have been weak and/or inconclusive. Because endogeneity is a constant challenge in empirical corporate governance studies, this study uses a unique law change in Switzerland as a source of exogenous variation in the fraction of rms with dual-class shares. Controlling for rm xed effects and time-varying confounders, we nd that dual-class shares neither harm nor benet rm performance on average. However, dual-class shares increase rm performance if the rm requires external nance and dual-class shares decrease rm performance if the rm does not require external nance. External nancing needs mitigate the agency costs between controlling and minority shareholders and create a context in which dual-class shares facilitate rm-specic investments instead of private perquisites. The studys results have both managerial and policy implications.
Keywords Corporate governance Dual-class shares Agency theory
Stewardship theory Shareholder value Natural experiment
JEL Classication G32 M21
& Stephan Nesch [email protected]
1 Chair of Business Management, Westfalische-Wilhelms University of Mnster,
Georgskommende 26, 48143 Mnster, Germany
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1 Introduction
Dual-class shares create disproportionality between voting rights and cash ow rights. Several software and social media rms (e.g., Google, Zynga, LinkedIn, Groupon, Facebook) have recently gone public with two or sometimes three classes of shares with different voting power. Dual-class equity is typically created to help founders and other dominant owners, which we refer to as controlling shareholders in this study, to expand the rm without losing much control. By holding shares that carry ten votes per share, the founders of Google (Sergey Brin and Larry Page), for example, control over 50 % of the voting power, but own less than 10 % of shares outstanding. A very similar equity structure puts Mark Zuckerberg, the founder and CEO of Facebook, in total command even after going public.
The effect of dual-class shares on rm performance is controversial. Opponents of dual-class shares argue that dual-class...