Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-15T10:52:26.217Z Has data issue: false hasContentIssue false
  • English
  • Français

Do Excess Control Rights Benefit Creditors? Evidence from Dual-Class Firms

Published online by Cambridge University Press:  12 February 2020

Ting Xu Open the ORCID record for Ting Xu [Opens in a new window]
Ting Xu*
Affiliation:
Xu, xut@darden.virginia.edu, University of Virginia Darden School of Business
Get access Rights & Permissions [Opens in a new window]

Abstract

Excess control rights by inside shareholders have been documented to hurt minority shareholders. This paper shows that such governance feature may benefit creditors. Using a sample of U.S. dual-class firms, I show that these firms take less operational and financial risk than similar single-class firms, consistent with insiders’ emphasis on long-term survival to access ongoing private control benefits. Such risk avoidance translates into lower borrowing costs for dual-class firms. Further, lenders are able to use specific covenants to prevent potential expropriations by insiders. The overall relationship between excess control rights and firm value may be less negative than previously thought.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 3 , May 2021 , pp. 821 - 852
Copyright
© The Author(s). Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

I am thankful to Jan Bena, Murray Carlson, Thomas Chemmanur, Ron Giammarino, Daniel Greene, Kai Li, Paul Malatesta (the editor), Yifei Mao, Ron Masulis (the referee), Hernán Ortiz-Molina, Carolin Pflueger, Pavle Radicevic, Kairong Xiao, Shuo Yang, and conference and seminar participants at the 2014 Financial Intermediation Research Society Conference, the 2014 Financial Management Association Asia/Pacific Conference, the 2013 Northern Finance Association Annual Meetings, and the University of British Columbia for helpful comments and discussions. I thank Andrew Metrick for sharing the dual-class firms data set. All errors are my own.

References

Abadie, A.; Diamond, A.; and Hainmueller, J.. “Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California’s Tobacco Control Program.” Journal of the American Statistical Association, 105 (2010), 493–505.CrossRefGoogle Scholar
Abadie, A., and Gardeazabal, J.. “The Economic Costs of Conflict: A Case Study of the Basque Country.” American Economic Review, 93 (2003), 113–132.CrossRefGoogle Scholar
Abadie, A., and Imbens, G. W.. “Large Sample Properties of Matching Estimators for Average Treatment Effects.” Econometrica, 74 (2006), 235–267.CrossRefGoogle Scholar
Acemoglu, D.; Hassan, T. A.; and Tahoun, A.. “The Power of the Street: Evidence from Egypt’s Arab Spring.” Review of Financial Studies, 31 (2017), 1–42.CrossRefGoogle Scholar
Admati, A. R.; Pfleiderer, P.; and Zechner, J.. “Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium.” Journal of Political Economy, 102 (1994), 1097–1130.CrossRefGoogle Scholar
Aghion, P.; Akcigit, U.; Bergeaud, A.; Blundell, R.; and Hémous, D.. “Innovation and Top Income Inequality.” Review of Economic Studies, 86 (2019), 1–45.CrossRefGoogle Scholar
Allen, F.; Carletti, E.; Qian, J.; and Valenzuela, P.. “Financial Intermediation, Markets, and Alternative Financial Sectors.” In Handbook of the Economics of Finance, Vol. II, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. The Netherlands: Elsevier (2013), 759–798.CrossRefGoogle Scholar
Anderson, R. C.; Mansi, S. A.; and Reeb, D. M.. “Founding Family Ownership and the Agency Cost of Debt.” Journal of Financial Economics, 68 (2003), 263–285.CrossRefGoogle Scholar
Anderson, R. C., and Reeb, D. M.. “Founding Family Ownership and Firm Performance: Evidence from The S&P 500.” Journal of Finance, 58 (2003a), 1301–1328.CrossRefGoogle Scholar
Anderson, R. C., and Reeb, D. M.. “Founding Family Ownership, Corporate Diversification, and Firm Leverage.” Journal of Law and Economics, 46 (2003b), 653–684.CrossRefGoogle Scholar
Aslan, H., and Kumar, P.. “Strategic Ownership Structure and the Cost of Debt.” Review of Financial Studies, 25 (2012), 2257–2299.CrossRefGoogle Scholar
Atanasov, V.; Black, B.; and Ciccotello, C. S.. “Law and Tunneling.” Journal of Corporate Law, 37 (2011), 1–49.Google Scholar
Atanasov, V.; Black, B.; and Ciccotello, C. S.. “Unbundling and Measuring Tunneling.” University of Illinois Law Review, (2014), 1697–1738.Google Scholar
Ayyagari, M.; Demirgüç-Kunt, A.; and Maksimovic, V.. “Financing in Developing Countries.” In Handbook of the Economics of Finance, Vol. II, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. The Netherlands: Elsevier (2013), 683–757.Google Scholar
Banerjee, S., and Masulis, R. W.. “Ownership, Investment and Governance: The Costs and Benefits of Dual Class Shares.” Finance Working Paper No. 352, European Corporate Governance Institute (2017).Google Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2008), 783–827.CrossRefGoogle Scholar
Berger, E. A.; Butler, A. W.; Hu, E.; and Zekhnini, M.. “Financial Integration and Credit Democratization: Linking Banking Deregulation to Economic Growth.” Journal of Financial Intermediation, forthcoming (2020).Google Scholar
Berger, P. G.; Ofek, E.; and Yermack, D. L.. “Managerial Entrenchment and Capital Structure Decisions.” Journal of Finance, 52 (1997), 1411–1438.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.CrossRefGoogle Scholar
Bharath, S. T., and Shumway, T.. “Forecasting Default with the Merton Distance to Default Model.” Review of Financial Studies, 21 (2008), 1339–1369.CrossRefGoogle Scholar
Bradley, M., and Roberts, M. R.. “The Structure and Pricing of Corporate Debt Covenants.” Working Paper, University of Pennsylvania (2004).CrossRefGoogle Scholar
Campa, J. M., and Kedia, S.. “Explaining the Diversification Discount.” Journal of Finance, 57 (2002), 1731–1762.CrossRefGoogle Scholar
Cavallo, E.; Galiani, S.; Noy, I.; and Pantano, J.. “Catastrophic Natural Disasters and Economic Growth.” Review of Economics and Statistics, 95 (2013), 1549–1561.CrossRefGoogle Scholar
Chava, S., and Roberts, M. R.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 2085–2121.CrossRefGoogle Scholar
Cremers, M.; Lauterbach, B.; and Pajuste, A.. “The Life Cycle of Dual-Class Firms.” Working Paper, European Corporate Governance Institute (2018).Google Scholar
Cremers, M.; Nair, V.; and Wei, C.. “Governance Mechanisms and Bond Prices.” Review of Financial Studies, 20 (2007), 1359–1388.CrossRefGoogle Scholar
Cronqvist, H.; Heyman, F.; Nilsson, M.; Svaleryd, H.; and Vlachos, J.. “Do Entrenched Managers Pay Their Workers More?” Journal of Finance, 64 (2009), 309–339.CrossRefGoogle Scholar
Demsetz, H., and Lehn, K.. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy, 93 (1985), 1155–1177.CrossRefGoogle Scholar
Dey, A.; Wang, X.; and Nikolaev, V. V.. “Disproportional Control Rights and the Bonding Role of Debt.” Working Paper, University of Minnesota (2012).Google Scholar
Duffie, D.; Saita, L.; and Wang, K.. “Multi-Period Corporate Default Prediction with Stochastic Covariates.” Journal of Financial Economics, 83 (2007), 635–665.CrossRefGoogle Scholar
Dyck, A., and Zingales, L.. “Private Benefits of Control: An International Comparison.” Journal of Finance, 59 (2004), 537–600.CrossRefGoogle Scholar
Eisdorfer, A. “Empirical Evidence of Risk Shifting in Financially Distressed Firms.” Journal of Finance, 63 (2008), 609–637.CrossRefGoogle Scholar
Faccio, M.; Marchica, M.-T.; and Mura, R.. “Large Shareholder Diversification and Corporate Risk-Taking.” Review of Financial Studies, 24 (2011), 3601–3641.CrossRefGoogle Scholar
Fehder, D. C., and Hochberg, Y. V.. “Accelerator Programs and the Regional Supply of Venture Capital Investment.” Working Paper, University of Southern California (2018).Google Scholar
Gao, H.; Harford, J.; and Li, K.. “Determinants of Corporate Cash Policy: Insights from Private Firms.” Journal of Financial Economics, 109 (2013), 623–639.CrossRefGoogle Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–156.Google Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Extreme Governance: An Analysis of Dual-Class Firms in the United States.” Review of Financial Studies, 23 (2010), 1051–1088.CrossRefGoogle Scholar
Gopalakrishnan, V., and Parkash, M.. “Borrower and Lender Perceptions of Accounting Information.” Accounting Horizons, 9 (1995), 13–26.Google Scholar
Gormley, T. A., and Matsa, D. A.. “Common Errors: How to (and Not to) Control for Unobserved Heterogeneity.” Review of Financial Studies, 27 (2013), 617–661.CrossRefGoogle Scholar
Hong, H. A. “Does Mandatory Adoption of International Financial Reporting Standards Decrease the Voting Premium for Dual-Class Shares?” Accounting Review, 88 (2013), 1289–1325.CrossRefGoogle Scholar
Howell, J. W. “The Value of Blockholder Liquidity and the Decision to Unify Share Classes.” Working Paper, Reiman School of Finance (2011).CrossRefGoogle Scholar
Jiang, W.; Li, K.; and Wang, W.. “Hedge Funds and Chapter 11.” Journal of Finance, 67 (2012), 513–560.CrossRefGoogle Scholar
John, K.; Litov, L.; and Yeung, B.. “Corporate Governance and Risk-Taking.” Journal of Finance, 63 (2008), 1679–1728.CrossRefGoogle Scholar
Johnson, S.; La Porta, R.; Lopez-De-Silanes, F.; and Shleifer, A.. “Tunnelling.” American Economic Review, 90 (2000), 22–27.CrossRefGoogle Scholar
Kim, E. H., and Lu, Y.. “CEO Ownership, External Governance, and Risk-Taking.” Journal of Financial Economics, 102 (2011), 272–292.CrossRefGoogle Scholar
Kim, H., and Michaely, R.. “Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Structures.” Working Paper, Cornell University (2018).CrossRefGoogle Scholar
Klein, A., and Zur, E.. “The Impact of Hedge Fund Activism on the Target Firm’s Existing Bondholders.” Review of Financial Studies, 24 (2011), 1735–1771.CrossRefGoogle Scholar
Klock, M. S.; Mansi, S. A.; and Maxwell, W. F.. “Does Corporate Governance Matter to Bondholders?” Journal of Financial and Quantitative Analysis, 40 (2005), 693–719.CrossRefGoogle Scholar
Lehn, K.; Netter, J.; and Poulsen, A.. “Consolidating Corporate Control.” Journal of Financial Economics, 27 (1990), 557–580.CrossRefGoogle Scholar
Lin, C.; Ma, Y.; Malatesta, P.; and Xuan, Y.. “Ownership Structure and the Cost of Corporate Borrowing.” Journal of Financial Economics, 100 (2011), 1–23.Google Scholar
Maddala, G. S.Limited-Dependent and Qualitative Variables in Econometrics. Cambridge: Cambridge University Press (1983).CrossRefGoogle Scholar
Masulis, R. W.; Pham, P. K.; and Zein, J.. “Family Business Groups around the World: Financing Advantages, Control Motivations, and Organizational Choices.” Review of Financial Studies, 24 (2011), 3556–3600.CrossRefGoogle Scholar
Masulis, R. W.; Wang, C.; and Xie, F.. “Agency Problems at Dual-Class Companies.” Journal of Finance, 64 (2009), 1697–1727.CrossRefGoogle Scholar
Nenova, T. “The Value of Corporate Voting Rights and Control: A Cross-Country Analysis.” Journal of Financial Economics, 68 (2003), 325–351.CrossRefGoogle Scholar
Nini, G.; Smith, D. C.; and Sufi, A.. “Creditor Control Rights, Corporate Governance, and Firm Value.” Review of Financial Studies, 25 (2012), 1713–1761.CrossRefGoogle Scholar
Ortiz-Molina, H. “Top Management Incentives and the Pricing of Corporate Public Debt.” Journal of Financial and Quantitative Analysis, 41 (2009), 317–340.CrossRefGoogle Scholar
Seidler, J., and Jakubík, P.. “Implied Market Loss Given Default in the Czech Republic: Structural-Model Approach.” Czech Journal of Economics and Finance, 59 (2009), 20–40.Google Scholar
Smart, S. B.; Thirumalai, R. S.; and Zutter, C. J.. “What’s in a Vote? The Short-and Long-Run Impact of Dual-Class Equity on IPO Firm Values.” Journal of Accounting and Economics, 45 (2008), 94–115.Google Scholar
Villalonga, B., and Amit, R.. “How Do Family Ownership, Control and Management Affect Firm Value?” Journal of Financial Economics, 80 (2006), 385–417.CrossRefGoogle Scholar
Wooldridge, J.Econometric Analysis of Cross Section and Panel Data. Boston: MIT Press (2010).Google Scholar
Supplementary material: File

Xu supplementary material

Xu supplementary material

Download Xu supplementary material(File)
File 379.4 KB