Corporate governance and firm value at dual class firms

    Corporate Governance and Firm Value at Dual Class Firms Ting Li, Nataliya Zaiats PII: DOI: Reference:

S1058-3300(16)30099-4 doi: 10.1016/j.rfe.2017.07.001 REVFIN 413

To appear in:

Review of Financial Economics

Received date: Revised date: Accepted date:

14 September 2016 7 April 2017 11 July 2017

Please cite this article as: Li, T. & Zaiats, N., Corporate Governance and Firm Value at Dual Class Firms, Review of Financial Economics (2017), doi: 10.1016/j.rfe.2017.07.001

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Corporate Governance and Firm Value at Dual Class Firms

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Ting Li and Nataliya Zaiats∗

This Version: July 2017

Li is from Department of Management & Business, Skidmore College, Saratoga Springs, NY 12866, [email protected], (518)580-5239. Zaiats is from Sawyer Business School, Suffolk University, Boston, MA 02108, [email protected], (617)573-8340. We are grateful for the insightful suggestions and comments from the editor Tarun Mukherjee, three anonymous reviewers, Lilian Ng, Hung-Chia Hsu, Yong-Cheol Kim, Richard Marcus, Valeriy Sibilkov, Daewoung Choi, Brian Bolton, and James G. Tompkins, as well as participants of 2015 Annual Meeting of the Financial Management Association in Orlando, 2015 Annual European Conference of the Financial Management Association in Venice, and 2011 Annual Meeting of Southern Finance Association in Key West. All remaining errors are our responsibility. ∗

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Corporate Governance and Firm Value at Dual Class Firms

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Abstract

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This study explores whether corporate governance at dual class firms differs from that of their single class counterparts and whether firm value at dual class firms is associated with governance. Employing a sample of 1,309 U.S. dual class firm-year observations for the period 1996-2006, we show evidence that dual class firms are more likely to employ more shareholder rights provisions while exhibiting lower board and board committee independence than single class firms. The results also show that shareholder rights increase while board provisions decrease in wedge at dual class firms. Further findings underscore that firm value at dual class firms decreases in wedge, and increases in shareholder rights and in board-related provisions, particularly in director independence. While strong board-related governance at dual class firms is significantly positively related to firm value in a multivariate setting, shareholder rights are significantly associated with firm value only in instances of the weakest board provisions. Following unification, firms employ more antitakeover provisions while strengthening their board and board committee independence.

Keywords: Dual class firms; Corporate governance; Firm value; Unification JEL Classification Number: G32; G34

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1. INTRODUCTION

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Dual class ownership structure represents the strongest antitakeover provision, and thus firms with dual class status are practically immune to a hostile takeover. Gompers, Ishii, and Metrick (2009) (GIM (2009) thereafter) report that about 6 percent of public companies in the U.S. during 1995-2002 have more than one class of common stock. Notably, a number of prominent firms such as Google, Facebook, Nike, and Polo Ralph Lauren employ dual class ownership structure to retain their voting power. Since the NYSE abandoned the requirement of listing with only one share class in 1986, firms with dual class ownership structure have gathered strong attention in empirical research in finance and economics. Specifically, prior literature focuses on agency problems, abnormal returns, and firm values. Herein, we investigate whether corporate governance at dual class firms differs from that at single class firms and whether governance at dual class firms is related to firm value.

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The divergence between voting and cash flow rights at dual class firms exacerbates the agency conflicts between managers and the outside investors. Firm managers are therefore more prone to pursue private control benefits at shareholders’ expense. In line with the above argument, extant studies underscore the agency problems associated with dual class ownership structure. For instance, GIM (2009) show that firm value is positively associated with insiders’ cash flow rights while negatively associated with insiders’ voting rights. Masulis et al. (2009) document that large excess control rights at dual class firms lead to both greater private benefits of control and reduced market value to the outside shareholders. Li et al. (2008) demonstrate that the level of institutional ownership is substantially lower at dual class firms than at single class firms, and that the lack of shareholder voting rights at dual class firms is a key detrimental factor in the portfolio decisions of institutional investors. To the best of our knowledge, no study to date has focused on corporate governance at dual class firms. Since dual class status is the strongest antitakeover provision, it is important to assess whether and how dual class firms employ the various alternative antitakeover mechanisms, as well as whether their board-related governance provisions differ from those at their single class 1

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counterparts. Further, it is of particular interest to document whether governance differences between single and dual class firms and among the dual class firms help explain value implications at dual class firms. Although dual class ownership structure allows insiders to retain strong voting power, the shareholder rights provisions, if available, may protect the outside investors against the strongest antitakeover feature, represented by dual class status. It is also plausible that dual class firms with stronger governance exhibit higher firm values than their counterparts with weaker governance, even after controlling for voting and cash flow rights divergence. Therefore, in this study, we answer the following two questions. (1) Does corporate governance at dual class firms differ from that at their single class counterparts? (2) Are governance provisions at dual class firms significantly associated with firm value?

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We employ a comprehensive U.S. dual class firm database to examine corporate governance at these firms during 1996-2006. We draw on prior literature to identify five key antitakeover provisions and seven board-related provisions that have previously been shown to affect shareholder rights or firm value. We examine these provisions individually as well as construct additive indices to capture all shareholder rights provisions or board-related provisions - shareholder rights index (SRI ) and board-related index (BRI ). Focusing on a sample of 1,309 dual class firm-year observations, our results show that dual class firms employ fewer antitakeover provisions (exhibit stronger shareholder rights), more of several key board-related provisions associated with stronger governance, while exhibiting weaker board and board committee independence than single class firms. Specifically, a larger proportion of dual class firms than of single class firms allow shareholders to call special meeting, act by written consent, have no poison pill, no staggered board, and offer shareholders cumulative voting rights. A larger proportion of dual class firms than of single class firms exhibit a higher board meeting attendance ratio, optimal board size (board size between 5 and 16 members), have CEO serving on 2 or fewer outside boards, and have separate chairman and CEO positions. More dual class firms, however, exhibit lower compensation committee, nomination committee, and director independence. Firms with the above features are more likely (or less likely, as above, respectively) to be dual class firms and the proportion of firms with the above provisions increases (or decreases, as above, respectively) with divergence between voting and 2

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We further examine whether and how corporate governance adopted by dual class firms relates to firm value. We measure firm value as the industry-adjusted natural log of Tobin’s Q. We construct portfolios based on wedge (voting rights minus cash flow rights) and shareholder rights index (SRI ) or board-related index (BRI ), respectively. The results show that firm value increases in each wedge portfolio with an improvement in shareholder rights or in board-related governance. The multivariate tests show that both the shareholder rights index and the board-related index are positively significantly related to firm value. However, none of the individual shareholder rights provisions exhibits a significant relationship with firm value. Among board-related provisions, director independence exhibits a positive significant link with value. Further tests suggest that the strongest shareholder rights provisions relate positively to value only in instances of the weakest board-related governance.

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Finally, we assess whether and how the ownership structure change from dual to single class status affects firm-level corporate governance. The goal of this pursuit is to provide further support to our key finding of the relationship between firm-level corporate governance and dual class ownership structure. We find that following unification, the proportion of firms allowing shareholders to call special meetings, act by written consent, those without a poison pill or staggered board in place, or those that offer shareholders cumulative voting rights, declines. Such a change implies a fall in shareholder rights for firms that can no longer enjoy the increased private control benefits associated with the dual class status. In turn, the proportion of firms with stronger director independence as well as stronger nominating and compensation committee independence increases following unification. We also find that dual class firms without a poison pill in place and those that allow shareholders to act by written consent are less likely while those with stronger director independence are more likely to unify. In sum, the results of the tests which focus on changes from dual to single class ownership structure, indicate governance shifts from governance provisions consistent with dual class status, towards their counterparts consistent with single class status, and are respectively aligned with our main results of the relationship between dual class status and corporate governance. 3

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Our study advances the existing literature in two ways. First, we expand the growing body of work that examines the agency concerns at dual class firms. Superior voting rights may be sufficient to provide incumbents at dual class firms with a powerful entrenchment mechanism. While extant studies focus on divergence between voting and cash flow rights to assess how insiders exploit private control benefits at outside investors’ expense, we examine whether and how corporate governance varies among dual class firms as well as between dual class firms and their single class counterparts. We document that dual class firms employ fewer alternative antitakeover mechanisms and exhibit weaker board and board committee independence than do single class firms. We also show that shareholder rights at dual class firms improve, while board-related governance worsens in divergence between voting and cash flow rights. Broadly, we fill the gap in the literature by uncovering evidence of a complex interplay between dual class ownership structure, shareholder rights, and board-related characteristics.

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Second, our study presents direct evidence on the link between corporate governance and firm value at dual class firms. Prior studies argue that the dual class structure is related to agency problems and low firm values (e.g., GIM, 2009; Masulis et al., 2009). This study fills the gap in the literature by demonstrating that governance differences at dual class firms exhibit value implications, even after controlling for divergence between voting and cash flow rights. Specifically, in presence of dual class ownership structure, which represents the strongest antitakeover device, the alternative antitakeover provisions broadly do not relate significantly to firm value. Specifically, only the strongest shareholder rights index is positively significantly related to firm value and only in instances of the poorest board governance. Importantly, however, dual class firms with strong board-related governance exhibit higher firm values. These results thus demonstrate that dual class structure is not value destructive for all firms - dual class firm values increase in governance, especially in stronger board-related provisions pertinent to board and board committee independence. The remainder of this paper is organized as follows. Section 2 presents our motivation and hypotheses development. Section 3 describes the sample and variables employed in the empirical tests as well as summarizes their statistics. Section 4 presents the empirical results, and the final section concludes. 4

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2. MOTIVATION AND HYPOTHESES DEVELOPMENT

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2.1. Controversies at Dual Class Firms and Corporate Governance

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Numerous studies have examined the advantages and drawbacks of dual class firms. Consistent with the approach that multiple share classes may be beneficial, a body of work documents that dual class ownership structure offers an efficient arrangement. DeAngelo and DeAngelo (1985) suggest that dual class firms may be viewed as an intermediate organizational form between a corporation with dispersed ownership and a closely-held firm, and that this form is more likely when managerial voting ownership yields benefits. Grossman and Hart (1988) contend that although one share-one vote arrangement maximizes the importance of benefits to securityholders, it does not always do so in a corporate control contest. In a similar fashion, Amoako-Adu and Smith (2001) illustrate that dual class capitalization is employed as a monitoring mechanism to prevent an undesired takeover. Further, comparing dual and single class IPOs, Smart and Zutter (2003) and Smart et al. (2008) show that dual class firms reduce the dilution effect, mitigate underinvestment problem, and experience less underpricing than their single class counterparts. Prior literature also demonstrates that dual class ownership structure allows mitigating the agency concerns. For example, Moyer et al. (1992) argue that the diminished role of market for corporate control in dual class firms could be offset by enhancements in alternative agency control mechanisms, such as board composition and capital structure policy. Further, Taylor and Whittred (1998) identify a variety of contractual, institutional, and personal mechanisms which help ensure that gains are shared equally by both stockholder classes in case control changes occur. An increasing body of literature, however, argues that dual class ownership structure may be suboptimal. For example, Cronqvist and Nilsson (2003) contend that the controlling minority shareholders internalize only a small fraction of negative consequences of dual class ownership, while enjoy all of the private benefits, thus causing private benefits extraction. Focusing on a sample of dual class firms listed on 30 largest national capital markets, Nenova (2003) confirms that parties in control of a corporation extract private control benefits to the exclusion of dispersed 5

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shareholders. Li et al. (2008) document that voting rights are critical to institutional investor decisions and that institutional ownership is significantly lower at dual class than at single class firms. Dual class status thus appears to compromise firms’ access to equity capital by discouraging institutional investment. Extant studies also particularly focus on the agency concerns that arise in firms with dual class ownership structure. For instance, Holmen and Nivorozhkin (2007) examine Swiss dual class firms and conclude that dual class ownership reduces the likelihood of acceptance of value enhancing takeovers by the controlling family. Masulis et al. (2009) show that as the divergence between insider voting and cash flow rights widens, corporate cash holdings are worth less to the outside shareholders, CEOs receive higher compensation, managers make shareholder value-destroying acquisitions more often, and capital expenditures contribute less to shareholder value.

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To the best of our knowledge, no study to date has directly examined corporate governance at dual class firms. We thus derive our conjectures pertinent to governance at dual versus at single class firms by referring to evidence from the above private control benefits and agency-related dual class literature. First, we are interested to ascertain whether and how dual class firms employ alternative antitakeover mechanisms. As dual class ownership structure is the strongest antitakeover device (GIM, 2009), it is plausible that dual class firms do not exhibit the necessity to employ the alternative antitakeover devices to protect themselves from the market for corporate control to the degree that single class firms do. By the same token, dual class firms may exhibit stronger shareholder rights, as demonstrated by fewer alternative antitakeover mechanisms employed. Second, we aim to compare board-related governance at dual class firms to that at their single class counterparts as numerous studies have illustrated that board provisions relate significantly to shareholder rights or firm value.1 We contend that based on the mounting evidence of the various agency concerns associated with dual class ownership structure, dual class firms may exhibit weaker board-related governance than their single class counterparts. Consistent with this argument, DeAngelo and DeAngelo (1985) state that superior voting rights at dual class firms provide 1 See,

for example, Yermack (1996), Eisenberg et al. (1998), Bebchuk and Cohen (2005), Boone et al. (2007), Coles et al. (2008), among others.

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ACCEPTED MANUSCRIPT managers with greater influence over the composition of the board of directors and thus, with stronger impact pertinent to the firms’ general policies. The arguments above lead to our first hypothesis:

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H1: Corporate governance at dual class firms differs significantly from that at single class firms.

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Dual class firms exhibit stronger shareholder rights while weaker board-related governance

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than single class firms.

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2.2. Firm Value at Dual Class Firms and Corporate Governance

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We are further interested to ascertain whether governance differences at dual class firms bear any firm value implications. It is plausible that corporate governance exhibits no incremental role in valuation once the divergence between voting and cash flow rights is conditioned upon.

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Numerous studies report the effects of dual class ownership structure on firm value. One strand of literature suggests that dual class firms exhibit positive value implications. For instance, Harris and Raviv (1988) argue that separating cash flow and voting rights at dual class firms can maximize firm value at social optimality and that the equity value increases once the firm announces a change from single to dual class ownership structure. In a similar fashion, Cornett and Vetsuypens (1989) and Dimitrov and Jain (2006) document that dual class recapitalization is associated with an increase in abnormal stock prices and enhanced shareholder value. On the contrary, an increasing strand of studies suggests that dual class ownership structure is associated with negative valuation effects. Specifically, Jarrell and Poulsen (1988) report significantly negative returns at the announcement of dual class recapitalization. Focusing on the sample of firms from eight East Asian economies, Claessens et al. (2002) provide evidence that firm value increases with cash flow rights of the largest shareholder but decreases in instances of divergence between voting and cash flow rights. Examining eighteen emerging markets, Lins (2003) reports that firm value is lower when management’s control rights exceed cash flow rights. GIM (2009) examine a comprehensive sample of the U.S. dual class firms and find that firm value increases in insiders’ cash flow rights 7

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A vast literature also documents the association between corporate governance and firm value. For instance, GIM (2003) and Bebchuk et al. (2003) show a positive significant relationship between governance and firm performance, measured by abnormal stock returns or Tobin’s Q. Further, Chhaochharia and Laeven (2009) examine corporate governance across 30 countries and illustrate that firms adopt the various favorable governance provisions beyond those minimally required for all firms in a country, and that such governance improvements exhibit a positive significant relationship with firm value.

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Among corporate governance provisions, extant studies address the valuation effects of antitakeover and of board-related provisions. A large body of work documents negative valuation effects of antitakeover provisions, while some studies report positive value implications.2 GIM (2003) show that firms with stronger shareholder rights exhibit higher firm value, profits, and sales growth. Core et al. (2006) find that weak shareholder rights are associated with significant operating underperformance, while not with poor stock returns. Bebchuk et al. (2009) argue that an increase in entrenchment index is associated with a significant reduction in firm value and large negative stock returns. However, reexamining the relationship between firm value and a number of antitakeover provisions, Straska and Waller (2010) document that value is enhanced at firms with low bargaining power which adopt more antitakeover provisions. In this study, we are interested to assess whether antitakeover provisions at dual class firms exhibit any valuation effects. In the context of the above evidence, one could argue for important value implications of shareholder rights. Thus, it is a priori unclear whether the valuation effects of shareholder rights could be different or weaker than those of other governance provisions, such as of board-related measures. It is important to recognize, however, that the results in the above studies pertain to the samples of all firms and do not particularly focus on the samples of dual class firms. Broadly, based on these findings, we anticipate that stronger shareholder rights at dual class firms relate positively to firm value. Alternatively, since dual class status is the strongest antitakeover device, the incremental 2 See, for example, DeAngelo and Rice (1983), Linn and McConnell (1983), Malatesta and Walkling (1988), Lins

(2003), among others.

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An increasing number of studies also document valuation effects of various board-related governance features. For instance, Yermack (1996) reports an inverse relationship between board size and firm value, and Eisenberg et al. (1998) find a negative significant association between board size and profitability in a sample of small and midsize Finnish Firms. More recently, Coles et al. (2008) document a U-shaped relationship between board size and Tobin’s Q. Further, a large strand of literature consistently reports that stock returns are superior when outside directors hold a significant percentage of board seats (e.g., Baysinger and Butler, 1985; Brickley and James, 1987; Byrd and Hickman, 1992; Lee, Rosenstein, Rangan, and Davidson, 1992; and Rosenstein and Wyatt, 1990). We thus postulate that stronger board-related governance at dual class firms may exhibit positive valuation effects. The implications above give rise to our second hypothesis:

H2: Corporate governance at dual class firms is positively related to firm value.

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3. DATA AND SAMPLE DESCRIPTION Our sample comprises the following data sources: a) dual class firms’ information from GIM (2009) and Nguyen and Xu (2010); b) corporate governance variables from Investor Responsibility Research Center (IRRC); c) stock returns and financial variables from CRSP and Compustat. In this section, we briefly describe the construction of our sample and provide some basic statistics pertinent to our key variables. Building a candidate sample based on data available from Securities Data Company (SDC), S&P’s Compustat, CRSP, and IRRC, GIM (2009) construct an exhaustive list of U.S. dual class firms by verifying their status with the SEC filings for the period 1994-2002. Insider holdings for all dual class firms for both stock classes are first coded, and voting and cash flow rights are then

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computed.3 Nguyen and Xu (2010) follow the sample selection criteria of GIM (2009) and extend the data to 2006. We are deeply grateful to all the authors for providing the information pertinent to the following variables: a) dual class status; b) voting rights, and c) cash flows rights for the combined sample between 1994 and 2006.

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We obtain corporate governance data from IRRC. Our study focuses on 5 antitakeover and 7 board-related provisions that may potentially affect shareholder rights or firm value. Drawn from prior literature, as explained in Section 2 above, we focus on the following antitakeover provisions: 1) shareholders may call special meetings; 2) shareholders may act by written consent; 3) company has no poison pill; 4) company has no staggered board; and 5) shareholders have cumulative voting rights. We employ the following board-related provisions: 1) all directors attended 75% of board meetings; 2) CEO serves on two or fewer boards of other firms; 3) the outside directors comprise more than 50% of all directors; 4) nominating committee is composed solely of independent outsiders; 5) compensation committee is composed solely of independent outsiders; 6) board size is greater than 5 but less than 16 directors; and 7) chairman and CEO positions are separate. While IRRC’s directors data is published annually, Corporate Takeover De f enses provides information for years 1995, 1998, 2000, 2002, 2004, and 2006. As antitakeover metrics appear to be relatively stable overtime, we set the missing values equal to prior year’s values. We designate 12 dummy variables that each take the value of 1 if a firm satisfies an antitakeover or a board-related provision from the list above, and 0 if otherwise. In addition to examining individual corporate governance metrics, we also focus on the additive indices pertinent to antitakeover and to board-related provisions. Specifically, we construct 2 indices for each firm: shareholder rights index (SRI ) and board-related index (BRI ). If dummy indicators for all 5 (7) antitakeover (board-related) provisions take the value of 1, the value of SRI (BSI ) index is 100%. Following Aggarwal et al. (2009), we express the corporate governance indices as a proportion of non-missing provisions for each firm.4 Each of the antitakeover/shareholder rights 3 Please see GIM (2009) for a detailed description of the sample selection procedure. 4 It is noteworthy that some studies (e.g., GIM, 2003; Bebchuk et al., 2008) compute additive indices as a proportion

of all rather than of non-missing provisions. In unreported tests, we also construct indices in this manner and obtain qualitatively similar results.

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and of the board-related provisions is associated with stronger governance. Thus, higher SRI or BRI implies that a firm employs fewer antitakeover provisions (exhibits stronger shareholder rights), or enjoys more effective board governance, respectively. It is important to underscore that both SRI and BRI , as well as the individual provisions that comprise these two indices, are not substantially different from Gompers, Ishii, and Metrick’s (2003) G-index and Bebchuk, Cohen, and Ferrell’s (2009) E-index. Rather, they include a majority of provisions from both of the above indices, while we customize the structure of our indices to best fit our research questions, as elaborated in Section 2 above.

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Among our initial dual class and single class firm-year observations, we require that governance variables from IRRC, as well as firm-level information from CRSP and Compustat be available to compute the control variables. We also exclude firms from utilities and financial industries. As the directors data from IRRC becomes available in 1996, we focus on the sample period between 1996 and 2006. Our final sample thus comprises 1,309 dual class and 3,342 single class firm-year observations. To prevent the potential effect of outliers on our results, we winsorize the variables at the top and bottom 1% of their respective distributions.

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Table 1 presents the distribution of corporate governance indices and of individual governance provisions for dual class and single class firms separately. We report means and medians (in brackets below the mean values) for the indices and proportions of firms for the individual provisions. Following GIM (2009), we also construct the separation sample, which comprises firms with voting rights greater than 50%, while with cash flow rights lower than 50%. The table also reports the differences between dual and single class firms, and between dual class firms in the separation sample and single class firms. Panel A provides the results for the pooled sample, while Panel B focuses on the matched sample. We match each dual class firm with a single class counterpart with the closest propensity score. We obtain propensity scores by estimating a Probit model with GIM (2009) dual class determinants, which include 1) Fama-French industry classification based on 48 portfolios; 2) a dummy variable that takes the value of 1 if a firm is a media company in its IPO year; 3) a dummy 11

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variable that takes the value of 1 if a firm is named after a founder; 4) a dummy variable that takes the value of 1 if a firm is in a state with antitakeover laws; 5) percentile ranking of the IPOyear sales; 6) a firm’s profit relative to other firms with the same IPO year; 7) percentage of all Compustat firms located in the same area in the year prior to IPO; 8) percentage of all Compustat sales by firms located in the same area in the year prior to IPO.5 It is noteworthy that our original sample includes 1,309 dual class firm-year observations in Panel A, while the matched sample comprises 913 dual class firm-year observations in Panel B. This outcome arises as we employ one-to-one matching with the caliper of 0.01 standard deviations of the linear propensity score. Such an approach results in greater precision of the matching process. When we relax the caliper restriction to 0.25 standard deviations, the unreported results remain unaltered.

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The results in both Panels A and B are consistent and reveal several interesting observations. SRI of dual class firms is higher, while BRI is lower than that of single class firms. The differences for the two indices between single class firms and the separation sample are even more pronounced. All the differences in means and medians are significant at 1% level. Such univariate statistics implies that dual class firms enjoy stronger shareholder rights while exhibit weaker board-related governance. Since dual class status is the strongest antitakeover provision that helps to effectively insulate the firms from the market for corporate control, it appears that dual class firms do not employ alternative antitakeover features to the extent that single class firms do. On the contrary, dual class firms exhibit less effective board provisions. The differences between dual and single class firms for the individual governance provisions in antitakeover category fully conform with the result pertinent to the SRI . Specifically, more dual class than single class firms allow shareholders to call special meetings, act by written consent, have no poison pill, no staggered board in place, and offer shareholders cumulative voting rights. Interestingly, however, among board-related provisions, dual class firms exhibit stronger governance features in some instances, while weaker in others. Specifically, more dual class than single class firms exhibit higher board meeting attendance ratios, optimal board size (i.e., between 5 and 16 directors), have CEOs who serve on 2 or fewer outside boards, and separate chairman 5 Please refer to GIM (2009) for a detailed description of the dual class status determinants.

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and CEO positions. In turn, dual class firms exhibit lower nominating committee, compensation committee, and director independence than their single class counterparts. Unreported Chi-square tests indicate that the differences of distributions of antitakeover provisions and of board-related provisions between dual class and single class firms are highly significant. In sum, while dual class firms enjoy some of the key board-related provisions pertinent to effective governance to a larger extent than do single class firms, their board and board committee independence is compromised compared to that of firms with single class status.

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Table 2 reports Pearson cross-correlation coefficients of the dual class dummy and the individual corporate governance provisions. We observe that the dual class status is significantly positively correlated with all the shareholder rights provisions, with the exception of cumulative voting rights. Dual class dummy exhibits a significantly negative correlation with board independence provisions, while significantly positive correlation with the remainder of the board-related variables. The majority of the corporate governance provisions are significantly correlated with one another. Broadly, the correlation coefficients between the variables in our sample are moderately low, suggesting no evidence of multicollinearity.

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4. RESEARCH DESIGN AND EMPIRICAL ANALYSIS 4.1. Likelihood of Dual Class Ownership Structure Although we demonstrate how the various governance provisions vary between dual and single class firms in Table 1, these tests establish the link between firm governance and dual class status in a univariate setting. GIM (2009) argue that firm, industry, and market characteristics at the time of a firm’s IPO determine whether dual class status will be adopted, and identify several key determinants of dual class status. The three authors further contend that the insiders are more likely to successfully adopt a dual class ownership structure at IPO time if the aggregate reduction in share value is less than the private benefits of control. In the context of findings in GIM (2009), we aim to ascertain in this sub-section whether and 13

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how a firm’s corporate governance is related to the likelihood of a firm to adopt a dual class ownership structure, after accounting for the above determinants, as well as for other firm characteristics that have shown by prior literature to relate to dual class status. Such a pursuit also allows distinguishing between governance features of dual versus single class firms. It is noteworthy that we estimate our tests in a contemporaneous setting, thereby indicating an association between dual class status and corporate governance, without suggesting any causality inferences.

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It is plausible that corporate governance exhibits no significant relationship with dual class status once the above GIM (2009) determinants have been conditioned upon, especially since at least several of these determinants could be related to governance (e.g., CEO-founder; antitakeover laws state), and thus may already capture the respective governance effects. Therefore, testing the incremental role of corporate governance precisely in the setting of GIM (2009), where the dual class status is regressed on the dual class determinants and the various firm-level control characteristics, while accounting for corporate governance, allows establishing that the role of governance in dual class status is distinct and persists rather than spuriously represents a relationship between dual class status and governance when none exists.

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We estimate Probit regressions assessing the likelihood of a firm’s dual class ownership structure by regressing Dual , a dummy variable that takes the value of 1 if a firm has a dual class status in year t and 0 if otherwise, on corporate governance indices SRI and BRI , as well as individual antitakeover and board-related provisions in year t . Drawing on prior literature, we also control for GIM (2009) dual class determinants, described in Section 3 above in propensity score matching procedure employed in Table 1 Panel B, as well as for the following firm characteristics: ratio of R&D over sales; advertisement expenditures indicator that takes the value of 1 if a firm’s advertisement expenditures are greater than 0, and 0 if otherwise; market-to-book ratio; capital expenditures over total assets; total assets; market capitalization; leverage; firm age; external financing; asset intangibility; and sales growth rate.6 The detailed description of all these variables is presented in the Appendix. Throughout the study, all multivariate regressions also include industry (based 6 See, for example, DeAngelo and DeAngelo (1985), Denis and Denis (1994), Claessens et al.

(2002), Faccio and Lang (2002), Cronqvist and Nilsson (2003), Holmen et al. (2007), Li et al. (2008), GIM (2009), Masulis et al. (2009), Schmid (2009), among others.

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ACCEPTED MANUSCRIPT on 48 Fama-French industry portfolios) and year fixed effects (as applicable), and all the associated p-values are computed based on standard errors adjusted for heteroscedasticity and firm-level clustering.

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Results are presented in Table 3 and underscore the coefficients of the governance indices as well as of individual governance provisions. To conserve space, the coefficients of the control characteristics are not tabulated. Models 1 and 2 display the results focusing on shareholder rights index (SRI ) and board-related index (BRI ), respectively, while Model 3 incorporates both indices. Model 4 includes individual governance provisions. As the various antitakeover or board-related provisions may capture similar quality of a firm’s shareholder rights environment or of boardrelated governance, our regression model incorporates one proxy variable at a time, while all the coefficients of individual provisions are reported in Model 4 due to space considerations.

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Consistent with our expectation, the results in Models 1-3 highlight that firms with higher shareholder rights index are more likely to be dual class firms, while firms with higher boardrelated index are less likely to employ dual class ownership structure. The coefficients of SRI and of BRI are significant at 1% level across all three models. Our findings in Model 4 suggest that firms employing each of the 5 shareholder rights provisions are more likely to be dual class firms. In turn, among board-related provisions, those pertaining to nominating committee, compensation committee, and board independence are associated with lower likelihood of dual class status. The remainder of the board-related provisions (with the exception of optimal board size, which is positive and marginally significant) is insignificantly related to the likelihood of dual class status. Such results imply that dual class firms are more likely to employ fewer alternative takeover devices and thus exhibit stronger shareholder rights than do single class firms. However, dual class firms appear to exhibit weaker board and board committee independence.

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The findings in the subsection above highlight that governance characteristics at dual class firms differ significantly from those at single class firms. To shed further light on the results above, in this subsection, we are interested to assess whether and how corporate governance at dual class firms varies with divergence between voting and cash flow rights. As in GIM (2009), voting (cash flow) rights are presented as the percentage of vote (cash flow) ownership by officers and directors across stock classes. We construct Wedge as the difference between voting and cash flow rights, with higher values implying a greater divergence between voting and cash flow rights, and thus, a potentially higher insider expropriation.

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Table 4 outlines means and medians of governance indices as well as proportions of dual class firms with individual governance provisions across three wedge portfolios. Port f olio 1 comprises the bottom one-third of dual class firms with the lowest wedge, while Port f olio 3 constitutes the top one-third of dual class firms with the largest divergence between voting and cash flows rights. The portfolios are constructed in the following fashion. Each year, all sample firms are ranked by Wedge and then divided into three equal portfolios. The differences in mean and in median values of both SRI and BRI indices between Port f olio 3 and Port f olio 1 are reported in the last column, along with the p-values associated with the t-test for the difference in means, and the Wilcoxon test for the difference in medians. For robustness, we have also constructed portfolios based on the ratios, rather than differences, of voting to cash flow rights. Untabulated results remain qualitatively comparable to those displayed in Table 4. The results reveal that shareholder rights index (SRI ) increases monotonically with wedge (i.e., from 0.709, to 0.787, and 0.866). Each of the individual antitakeover provisions follows the same pattern. Therefore, as divergence between voting and cash flow rights increases, firms tend to employ fewer antitakeover provisions. Interestingly, Port f olio 2 exhibits the highest board-related index (i.e., 0.638), as the index increases from its lowest level for Port f olio 1 (i.e., 0.591), while then decreases for Port f olio 3 albeit to a level slightly higher than that for Port f olio 1 (i.e., 0.596). 16

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The results for individual board-related provisions show a similar trend as does BRI , while the board-related governance appears to be weaker for Port f olio 3 than for Port f olio 1 across a majority of the board-related provisions. Thus, the middle one-third of dual class firms with the moderate wedge exhibits the most effective board governance, followed by the dual class firms with the lowest divergence between voting and cash flow rights, and then by those with the highest divergence.

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The results of the difference tests in means and medians consistently underscore that the shareholder rights index in the portfolio with the highest wedge is significantly higher than that in the lowest wedge portfolio. On the contrary, the portfolio with the highest wedge exhibits significantly weaker board governance compared to that in the portfolio with the lowest wedge. Such results imply that antitakeover provisions, as well as board governance, decrease in wedge.

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In sum, the results suggest that dual class firms may attempt to placate shareholders with the potential positive implications of stronger shareholder rights to countervail the plausibly detrimental effects of higher wedge, as firms with the highest wedge exhibit the strongest shareholder rights. In contrast, firms with the highest divergence between voting and cash flow rights exhibit the least effective board-related governance.

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4.3. Corporate Governance and Firm Value at Dual Class Firms Prior literature suggests that firm value is related to voting rights and to cash flow ownership. For instance, focusing on a sample of firms from the East Asian economies, Claessens et al. (2002) show that firm value improves with the cash flow ownership of the largest shareholder, while that it deteriorates in the instances of voting rights exceeding the cash flow rights. GIM (2009) examine a comprehensive sample of the U.S. firms and conclude that firm value increases in cash flow rights while decreases in voting rights. Also, extant literature demonstrates that strong corporate governance is associated with high firm value (e.g., GIM 2003; Bebchuk et al., 2008). In this subsection, we examine whether corporate governance at dual class firms exhibits an association with firm value. We are also interested to ascertain whether the link between governance and value 17

ACCEPTED MANUSCRIPT at dual class firms persists when the divergence between voting and cash flow rights is accounted for. We expect a positive relationship between governance and firm values at dual class firms that is distinct and unaffected by the inclusion of wedge.

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We follow Kaplan and Zingales (1997) to use Tobin’s Q as a proxy for firm value. We compute the metric as the market value of assets divided by the book value of assets, where the market value of assets is the book value of assets plus the market value of common stock less the book value of common stock and deferred taxes. We follow Francis, Schipper, and Vincent (2005) to adjust Tobins Q measure for inferior class shares by employing the inferior common equity rather than total common equity, thereby utilizing the inferior number of shares in the respective computation. Our tests thus report the results pertinent to firm value as captured by inferior shareholders. To reduce measurement errors, we further follow GIM (2009) to employ industry-adjusted ln Q, computed as the difference of the natural log of a firm’s Tobin’s Q and the natural log of industry’s Q. We employ 48 Fama-French industry portfolios to industry-adjust Tobin’s Q.7

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To assess the distributions of firm values across different wedge and governance profiles, we partition all dual class firms by Wedge and by shareholder rights or by board-related index, respectively. The portfolios are constructed in the following manner. Each year, all dual class firms are ranked by Wedge and grouped into three equal portfolios. Port f olio 1 represents the bottom one-third of dual class firms with the lowest wedge, while Port f olio 3 captures the top one-third of dual class firms with the highest wedge. We also independently rank all dual class firms each year by SRI and by BRI . We respectively assign dual class firms into three equal portfolios, where Port f olio 1 captures the bottom one-third of dual class firms with the lowest shareholder rights or board-related index, while Port f olio 3 includes the top one-third of dual class firms with the highest SRI or BRI . We then create eighteen distinct portfolios - nine portfolios of dual class firms based on Wedge and SRI , and nine portfolios - based on Wedge and BRI . Specifically, if a firm falls into Port f olio 1 based on Wedge and into Port f olio 1 based on SRI (BRI ), then it is assigned into Port f olio 11. Such a portfolio comprises all dual class firms with the lowest wedge and the 7 We also employed industry-adjusted Tobin’s Q (computed as the difference of a firm’s Tobin’s Q and the industry’s 1 and inverse industry-adjusted Q (computed as −( 1 − )) as firm value proxies. The results are

Q) consistent.

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Table 5 reports means and medians of firm values across nine wedge/shareholder rights index portfolios and nine wedge/board-related index portfolios. P-values are reported to the right of means and medians. We also provide the difference tests for mean and median firm values, along with the associated p-values for the t-test and the Wilcoxon test, respectively, between Port f olio 3 and Port f olio 1 within each Wedge portfolio to the right of the mean/median values, and between the portfolios with the highest and the lowest wedge, while controlling for governance, on the bottom of the table.

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The results demonstrate that firm values increase in shareholder rights in every wedge portfolio. Specifically, industry-adjusted ln Q increases from 0.118 in Port f olio 11 to 0.395 in Port f olio 13. Likewise, firm values increase from 0.407 to 0.534, and from 0.135 to 0.185, in Port f olios 21 and 23, and Port f olios 31 and 33, respectively. Interestingly, firm values are the highest across portfolios with Wedge = 2, while they are the lowest in portfolios with the highest divergence between voting and cash flow rights (i.e., in those with Wedge = 3). Such evidence indicates that accounting for divergence between voting and cash flow rights in dual class firms, shareholder rights play a positive role in firm value, and that higher wedge is generally associated with lower firm value. The results display a similar pattern across portfolios which focus on wedge and board-related provisions. Controlling for wedge, firm value generally increases in board-related provisions. Interestingly, firm values are the highest across portfolios with Wedge = 2, and they are the lowest in those with the highest wedge. The difference tests in means and medians suggest that firm value is significantly higher for firms with the strongest governance, as measured by both shareholder rights and board-related indices, compared to those with the weakest governance within each of the three wedge portfolios. Further, firm values are significantly lower for firms with the highest wedge, compared to those with the lowest wedge in portfolios pertinent to the shareholder rights index, as well as those based on the board-related index. 19

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These findings are aligned with our expectation that more effective board governance is associated with higher firm values even if divergence between voting and cash flow rights is accounted for. Combined, the findings in Table 5 imply that corporate governance provisions play a distinct role for firm values of dual class firms and could potentially help mitigate the negative valuation implications of divergence between voting and cash flow rights.

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We next assess whether corporate governance indices as well as individual governance provisions at dual class firms are associated with firm value in a multivariate setting. We conduct our analyses by regressing industry-adjusted ln Q on governance indices and on individual provisions, and report the results in Table 6. GIM (2009) argue that cash flow rights and voting rights affect insider incentives differently, and that each type of ownership can exert an independent effect on valuation. We thus control for cash flow and for voting rights in our regressions, as well as for squared terms of these two variables, to adjust for nonlinearities. We also draw on prior literature to include firm characteristics that have previously been shown to relate to firm value.8 We thus also include the following variables: total assets; firm age; Delaware incorporation indicator; insider ownership; return on assets; capital expenditures to total assets; leverage; and R&D to sales. Nevertheless, we are mindful of the endogenous nature of the relationship between firm value, ownership structure, and corporate governance, and recognize that the apparently exhaustive list of the control characteristics above could mitigate, while may not eliminate the omitted variable bias concerns. For instance, a successful firm may both adopt strong governance standards and exhibit higher firm value. In addition, by estimating the above regressions in a contemporaneous setting, we particularly underscore the goal to establish a measure of association between firm value and governance characteristics at dual class firms, while to remain cautious to not suggest causality directions. Models 1 and 2 focus on shareholder rights index and board-related index, respectively, while Model 3 comprises both indices. The results show that while board-related index, BRI , exhibits a positive strongly significant association with firm value, the coefficient estimates of shareholder 8 See,

for example, Denis and Denis (1994), Claessens et al. (2002), Cronqvist and Nilsson (2003), Lins (2003), GIM (2003), GIM (2009), Schmid (2009), among others.

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rights index, SRI , are insignificant. In Model 4, consistently with Table 3, the individual antitakeover and board provisions are incorporated into regressions with the inclusion of one variable at a time. The evidence in Model 4 corroborates that of the first three models. Specifically, none of the individual shareholder rights provisions exhibits a significant association with firm value. In turn, among board-related provisions, the coefficient of director independence is positive and significant, while the remainder of the board provisions is insignificantly associated with firm value. In sum, the evidence in Table 6 suggests that only board-related provisions, and director independence in particular, exhibit a positive significant association with firm value, while the shareholder rights provisions play no role in firm valuation. Such finding is perhaps not surprising as the implications from evidence in other tables suggest that it is plausible that dual class firms, especially those with stronger divergence between voting and cash flow rights, are more likely to exhibit stronger shareholder rights by adopting fewer antitakeover provisions. This evidence may not necessarily imply an insider behavior consistent with shareholder interests. Instead, as dual class status is the stronger antitakeover device, the alternative antitakeover mechanisms may not be marginally important to protect the firm from the corporate control market. Dual class firms may placate shareholders by adopting fewer antitakeover provisions, while these stronger shareholder rights do not seem to exhibit the link with the firm value. In contrast, dual class firms with more effective board governance appear to enjoy the positive valuation effects. As the findings in Table 6 above do not consistently point to a strong role of the majority of the governance provisions in firm valuation, we next attempt to shed more light on these results by exploiting the relationships of the extreme forms of governance at dual class firms with firm value. We focus on selected portfolios constructed for tests in Table 5 above. Specifically, we designate subsamples with the top one-third and the bottom one-third of firms by SRI , and by BRI . We thus create the following indicator variables - High SRI , Low SRI , High BRI , and Low BRI that each take the value of 1 if a dual class firm belongs to the respective portfolio in a given year, and 0 if otherwise. To verify whether the extreme forms of antitakeover or of board-related provisions exhibit any differential effects on firm valuation, we also construct the following interaction terms of these dummy indicators - High SRI × High BRI , High SRI × Low BRI , Low SRI × High BRI , 21

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Table 7 reports the results of OLS estimations across 4 models where industry-adjusted ln Q is regressed on different combinations of the indicator variables and their interactions, defined above. The control characteristics are the same as those in Table 6. The results underscore that high (low) board-related index is positively (negatively) significantly associated with firm value, while neither high nor low shareholder rights index bears a significant link with firm value. Interestingly, however, the results in Model 2 highlight that high shareholder rights index is positively significantly associated with firm value only in the instances of the low board-related index. Broadly, such findings corroborate those in Table 6. They suggest that the role of antitakeover provisions in firm valuation is rather limited as only the strongest shareholder rights index is positively associated with firm value and only if board-related governance is the weakest. Instead, the (in)effective board governance at dual class firms bears positive (negative) value implications across all specifications. Importantly, the role of board governance in dual class firm valuation persists as voting and cash flow rights are accounted for. This result underscores an incremental effect of board-related provisions on firm value at dual class firms.

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It is also particularly noteworthy that GIM (2009) find that firm value, as measured by Tobin’s Q, increases in insider cash flows rights, while declines in insider voting rights. Following GIM (2009), we control for these two measures as well as their quadratic terms, to adjust for nonlinearities, in our valuation regressions of Tables 6 and 7. In contrast to GIM (2009), who report significant relationships between voting or cash flow rights and firm value, our tests in the above two tables uncover evidence that corporate governance at dual class firms is significantly positively related to value. We also observe that in presence of governance measures, cash flow and voting rights lose statistical significance. This is an important finding and further supports the conjecture in our study that corporate governance at dual class firms exhibits incremental value implications.

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In this subsection, we are interested to ascertain whether and how the ownership structure change from dual to single class status affects firm-level corporate governance, thereby also providing some insights into direction of causality. However, we caution that the caveat of such causality inference is that it does not account for endogenous nature of the switch from dual to single class ownership structure (e.g., Li and Zaiats, 2017). In sum, although governance changes around unification events could suggest causality direction, we refrain from making the respective causality claims and merely employ the subsequent results to provide further support to our key finding of the relationship between firm-level corporate governance and dual class ownership structure.

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Extant literature examines the reasons for consolidations of dual class shares into single class as well as implications of unification. For instance, Amoako-Adu and Smith (2001) and Li et al. (2008) report that unification is required in debt restructuring, helps facilitate subsequent equity issuance and listings on the U.S. exchanges, and increases appeal by prospective investors, among others. Although Lauterbach and Yafeh (2011) do not find performance improvements following capitalization into single class in the sample of 80 Israeli firms, a growing strand of literature reports positive abnormal returns associated with the announcement of dual class unification as well as subsequent firm value increases and cost of equity financing reductions (e.g., Ehrhardt et al., 2005; Pajuste, 2005; Dittmann and Ulbricht, 2007). Drawing from findings of the above literature, especially those pertinent to the positive valuation effects, we predict that recapitalization into single class could be broadly beneficial for shareholders and could be associated with improved governance. We examine corporate governance changes around unification events by comparing the two periods - before and after unification. Specifically, we designate year t as unification year; thus, t − 3 (t − 5) and t + 3 (t + 5) denote 3(5) years prior to and following unification, respectively.9 We 9 In unreported tests, we also assess corporate governance changes examining periods 1 year prior to and following

unification, while do not observe any major governance changes in this shorter time frame. Such finding is perhaps not surprising as governance variables generally change slowly overtime.

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The results are contained in Table 8 and highlight means and medians of antitakeover index (SRI ), board-related index (BRI ) as well as proportions of firms with individual shareholder rights and with board-related provisions for the periods preceding and following unification events. We also report difference tests from before- to after-unification periods. The evidence suggests that shareholder rights index decreases, while board-related index increases significantly following unification. In all instances, the differences are more pronounced in 5-year than in 3-year time periods. With the exception of cumulative voting rights provision, where the proportion of firms with this provision appears to increase following unification, the proportions of firms with each of the remainder of shareholder rights provisions decrease after capitalization into single class. Among board-related provisions, those pertinent to independence - nominating committee, compensation committee, and director independence increase following unification, while the proportion of firms with high board meeting attendance, those with CEOs serving on 2 or fewer boards, with optimal board size, and separate chairman and CEO positions, decrease following unification. We interpret that as firms capitalize into single class thus removing the strongest antitakeover device of dual class status, they employ more alternative antitakeover mechanisms thereby decreasing shareholder rights. In turn, unification appears to be associated with more effective board governance as measured by stronger board independence metrics. In light of the results in Table 8 above, we are further interested to ascertain which dual class firm governance profiles exhibit a higher unification likelihood. We thus estimate a Probit model by regressing Uni f ication - a dummy indicator, which takes the value of 1 if a dual class firm capitalizes into single class in a given year and 0 if otherwise, on individual governance provisions separately. The control characteristics are drawn from prior literature that explores unification determinants and include the following variables - insider ownership; market-to-book ratio; capital expenditures to total assets; firm size; leverage; and sales growth rate.10 The detailed description 10 See, for example, Amoako-Adu and Smith (2001), Hauser and Lauterbach (2004), Pajuste (2005), Dittmann and

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of these variables is presented in the Appendix. As the various antitakeover or board-related provisions may capture similar quality of a firm’s shareholder rights environment or of board-related governance, consistently with Tables 3 and 6, our regression model incorporates one proxy variable at a time. Table 9 yields several interesting results. Among antitakeover provisions, firms that are allowed to act by written consent and those without a poison pill in place are less likely to unify. In turn, firms with higher director independence are more likely to unify. Based on earlier interpretations that shareholder rights provisions could potentially be employed by dual class firms to placate shareholders that adoption of these provisions signals insider behavior consistent with shareholder interests, we observe that the presence of some of these shareholder rights provisions is linked to lower likelihood of unification. However, board independence is apparently indicative of more effective board governance and is thus related to a higher unification likelihood.

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In sum, the results in Tables 8 and 9, which focus on changes from dual to single class ownership structure, indicate governance shifts from governance provisions consistent with dual class status, towards their counterparts consistent with single class status, and are respectively aligned with our main multivariate tests of the relationship between dual class status and corporate governance in Tables 3 and 4. Such results thus offer further support to the strength of the association between corporate governance and ownership structure.

5. CONCLUSION This study aims to assess (i) whether and how corporate governance at dual class firms differs from that at single class firms and (ii) whether governance at dual class firms is related to firm value. We exploit a sample of 1,309 U.S. dual class firm-year observations during 1996-2006 and obtain several interesting results that are consistent with our expectations. We show that dual class firms undertake fewer antitakeover provisions, more board-related provisions pertinent to strong governance, while exhibit weaker board and board committee independence compared to single class firms. Specifically, a larger proportion of dual class than of Ulbricht (2007), Li et al. (2008), among others.

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single class firms allow shareholders to call special meetings, act by written consent, have no poison pill or staggered board in place, and offer shareholders cumulative voting rights. Further, more dual class than single class firms exhibit a high board meeting attendance ratio, optimal board size, separate chairman and CEO positions, and have CEOs serving on 2 or fewer boards. However, nomination committee, compensation committee, and board independence are lower at dual class than at single class firms. We further show that firms with all the above governance provisions are more likely (or less likely, as above, respectively) to be dual class firms and that proportion of dual class firms with such provisions increases (or decreases, as above, respectively) with divergence between voting and cash flows rights (i.e., wedge). The multivariate result of a significant link between corporate governance and dual class status, while GIM (2009) determinants of the likelihood of the dual class status are conditioned upon, underscores an incremental, distinct role of governance in dual class ownership structure.

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Partitioning into portfolios by divergence between voting and cash flow rights and by governance provisions, we find that dual class firms with stronger shareholder rights or board-related provisions exhibit higher values in each wedge portfolio, and that firm values decrease with wedge. Although both shareholder rights and board-related provisions indices are significantly positively related to firm value in a multivariate setting, none of the individual shareholder rights provisions exhibits a statistically significant link with firm value. In turn, among board-related provisions, board independence is significantly positively associated with firm value. Further tests show that the strongest shareholder rights provisions index is positively significantly associated with firm value only in instances of the weakest board governance. Finally, we find that following unification, a larger proportion of firms employ each of the antitakeover provisions, while a smaller proportion of firms exhibit a high board meeting attendance ratio, optimal board size, separate chairman and CEO positions, and have CEOs serving on 2 or fewer boards. However, board and board committee independence increases after unification. We also find that firms, which allow shareholders to act by written consent or those with no poison pill in place are less likely, while firms with higher director independence are more likely to unify. 26

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We have thus offered evidence to suggest that dual class firms exhibit distinct governance profiles, compared to those of their single class counterparts, and that stronger governance at dual class firms relates positively to firm value. Such findings shed further light on the issue of dual class ownership structure cost-benefit tradeoff and the role of governance in this trade-off. Our results suggest that controlling for divergence between voting and cash flow rights, which has been shown by prior literature to relate negatively to firm value, stronger governance may countervail the detrimental value impacts of dual class ownership structure associated with the increased private control benefits.

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the Unification of Dual Class Shares. Journal of Corporate Finance 17, 215-228 Lee, C.I., Rosenstein, S., Rangan, N., Davidson III, W.N., 1992. Board Composition and Shareholder

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Wealth: The Case of Management Buyouts. Financial Management 21, 58-72 Lehn, K., Netter, J., Poulsen, A., 1990. Consolidating Corporate Control: Dual-Class Recapitalizations versus Leveraged Buyouts. Journal of Financial Economics 27, 557-580 Li, K., Ortiz-Molina, H., Zhao, X., 2008. Do Voting Rights Affect Institutional Investment Decisions? Evidence from Dual-Class Firms. Financial Management 37, 713-745 Li, T., Zaiats, N., 2017. Information environment and earnings management of dual class firms around the world. Journal of Banking and Finance 74, 1-23. Linn, S.C., McConnell, J.J., 1983. An Empirical Investigation of the Impact of ’Antitakeover’ Amendments on Common Stock Prices. Journal of Financial Economics 11, 361-399 Lins, K.V., 2003. Equity Ownership and Firm Value in Emerging Markets. The Journal of Financial and Quantitative Analysis 38, 159-184

Malatesta, P.H., Walkling, R.A., 1988. Poison Pill Securities: Stockholder Wealth, Profitability, and Own-

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ACCEPTED MANUSCRIPT ership Structure. Journal of Financial Economics 20, 347-376 Masulis, R.W., Wang, C., Xie, F., 2009. Agency Problems at Dual-Class Companies. The Journal of Finance 64, 1697-1727

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Recapitalizations. Financial Management 21, 35-47

T

Moyer, R.C., Rao, R., Sisneros P.M., 1992. Substitutes for Voting Rights: Evidence from Dual Class Nenova, T., 2003. The Value of Corporate Voting Rights and Control: A Cross-Country Analysis. Journal

SC

of Financial Economics 68, 325-351

Nguyen, V.T., Xu, L., 2010. The Impact of Dual Class Structure on Earnings Management Activities. Journal of Business Finance & Accounting 37, 456-485

Central Bank Working Paper Series

NU

Pajuste, A., 2005. Determinants and Consequences of the Unification of Dual-Class Shares. European

MA

Rosenstein, S., Wyatt, J.G., 1990. Outside Directors, Board Independence, and Shareholder Wealth. Journal of Financial Economics 26, 175-192

ED

Schmid, M.M., 2009. Ownership Structure and the Separation of Voting and Cash Flow Rights-Evidence from Switzerland. Applied Financial Economics 19, 1453-1476

PT

Smart, S.B., Thirumalai, R.S., Zutter, C.J., 2008. 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, 94-115

AC CE

Smart, S.B., Zutter, C.J., 2003. Control as a Motivation for Underpricing: A Comparison of Dual and Single-class IPOs. Journal of Financial Economics 69, 85-110 Straska, M., Waller, G., 2010. Do Antitakeover Provisions Harm Shareholders? Journal of Corporate Finance 16, 487-497

Taylor, S., Whittred, G., 1998. Security Design and the Allocation of Voting Rights: Evidence from the Australian IPO Market. Journal of Corporate Finance 4, 107-131 Yermack, D., 1996. Higher Market Valuation of Companies with a Small Board of Directors. Journal of Financial Economics 40, 185-211

31

ACCEPTED MANUSCRIPT Appendix Variable Definitions Definition

Takeover provisions

(Data source: IRRC)

Call special meeting

Equals 1 if shareholders may call special meetings, and 0 if otherwise

Act by written consent

Equals 1 if shareholders may act by written consent, and 0 if otherwise

No poison pill

Equals 1 if company has no poison pill, and 0 if otherwise

RI P

T

Variable

Equals 1 if company has no staggered board, and 0 if otherwise

Cumulative voting rights

Equals 1 if shareholders have cumulative voting rights, and 0 if otherwise

Board-related provisions

(Data source: IRRC)

All attend >75%

Equals 1 if all directors attended more than 75% of board meetings,

of board meetings

SC

No staggered board

and 0 if otherwise

Equals 1 if CEO serves on two or fewer boards of other firms,

outside boards

and 0 if otherwise

NU

CEO serves on 2 or fewer

Equals 1 if the outside directors are more than 50%, and 0 if otherwise

5
Equals 1 if board size is greater than 5 but less than 16,

MA

Outside directors>50%

and 0 if otherwise Nominating composed

Equals 1 if nominating committee is composed solely of independent

solely of outsiders

outsiders, and 0 if otherwise

Equals 1 if chairman and CEO are separated, and 0 if otherwise

Compensation composed

Equals 1 if compensation committee is composed solely of independent

Governance indices SRI

(Data source: IRRC) Percentage of non-missing shareholder rights provisions that a firm satisfies

BRI

Percentage of non-missing board-related provisions that a firm satisfies

AC CE

GIM (2009) determinants IPOname Media

outsiders, and 0 if otherwise

PT

solely of outsiders

ED

Chairman and CEO are separated

StateLaw

(Data source: GIM (2009) and COMPUSTAT) Equals 1 if the firm’s name at IPO includes a person’s name, and 0 if otherwise

Equals 1 if the firm was a “media“ company in its IPO year, and 0 if otherwise Equals 1 if the firm was incorporated in states with anti-takeover laws, and 0 if otherwise

SalesRank

Percentile ranking of the IPO year sales of the firm relative to other firms with the same IPO year

ProfitRank

Percentile ranking of the IPO year profit of the firm relative to other firms with the same IPO year

%Firms

Percentage of all Compustat firms located in the same metropolitan or micropolitan statistical area (MSA) as firm i in the year before firm i’s IPO

%Sales

Percentage of all Compustat sales by firms located in the same micropolitan statistical area (MSA) as firm i in the year before firm i’s IPO

Sales/RegionSales

Ratio of a firm’s sales to the sales of all firms in the same region

32

ACCEPTED MANUSCRIPT Variable Definitions (Continued)

Variable

Definition

Firm values

(Data source: COMPUSTAT)

Tobin’s Q

The market value of assets divided by the book value of assets,

T

where the market value of assets is the book value of assets plus the market sheet deferred taxes

RI P

value of inferior common stock less the book value of common stock less balance Ln Tobin’s Q - Ln Industry Q, based on 48 Fama-French industry portfolios

Other control variables

(Data source: CRSP, COMPUSTAT, and GIM(2009))

CFR

Cash flow rights, computed as total percentage of cash flow ownership by officers and directors across share classes

SC

Industry-adjusted ln Q

Squared cash flow rights

VR

Voting rights: computed as the total percentage of votes owned by officers and directors across share classes

NU

CFR2

Squared voting rights

Insider ownership

Fraction of shares owned by officers and directors

MA

VR2

The ratio of R&D expenditures to sales

Ad expenditures dummy

Equals 1 if advertisement expenditures are greater than 0, and 0 if otherwise

M/B

Market to book ratio

Capex/Assets

Capital expenditures to total assets

Total Assets

Log of the book value of total assets

Market Capitalization

Market price times number of outstanding shares

Leverage

Total debt to market value of total assets

Firm age

The number of years since a firm’s first appearance in CRSP

AC CE

PT

ED

R&D/Sales

External financing

The difference between required investment and internally available capital for investment

Asset intangibility

1-(PPE+Inventories)/ Total Assets

Sales growth rate

Average annual sales growth over the past 3 years

Delaware incorporation

Equals 1 if the firm is incorporated in Delaware, and 0 if otherwise

ROA

Net income to book value of total assets

33

ACCEPTED MANUSCRIPT

Table 1 Comparison of Corporate Governance between Dual and Single Class

Firms

NU

SC

RI P

T

This table presents univariate tests pertinent to corporate governance at dual versus single class firms. Specifically, we report means and medians (in brackets below mean values) of corporate governance indices and proportions of firms with individual governance provisions at dual and single class firms. Panel A focuses on the pooled sample of firms, while Panel B is based on the sample matched by propensity scores, obtained by estimating a Probit model with GIM (2009) dual class determinants. We also report difference tests between dual and single class firms and between dual class firms in the ”separation sample” and single class firms. SRI is shareholder rights index computed as the percentage of non-missing shareholder rights provisions that a firm satisfies. BRI is board-related index computed as the percentage of satisfied board-related provisions to non-missing board-related provisions. All variables are defined in the Appendix. NObs is the number of firm-year observations. Statistical significance is reported based on pvalues associated with the t -test for the difference in mean values and with Wilcoxon test for the difference in median values. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively. No statistical significance is presented for individual governance provisions computed as proportions of firms with such provisions. The sample period is from 1996 to 2006.

MA

Panel A: Pooled Sample Corporate Governance BRI

Shareholder rights provisions Act by written consent

AC CE

No poison pill

PT

Call special meeting

No staggered board

Cumulative voting rights

Board-related provisions

All attend >75% of board meetings CEO serves on 2 or fewer outside boards Outside directors>50%

Nominating composed solely of outsiders Compensation composed solely of outsiders 5
Single class Mean [Median] 0.59 [0.60] 0.70 [0.71]

Separation Mean [Median] 0.87 [1.00] 0.61 [0.60]

Dual-Single Mean [Median] 0.20*** [0.20***] -0.09*** [-0.11***]

Separation-Single Mean [Median] 0.28*** [0.40***] -0.09*** [-0.11***]

0.69 [1.00] 0.71 [1.00] 0.76 [1.00] 0.59 [1.00] 0.84 [1.00]

0.57 [1.00] 0.59 [1.00] 0.39 [0.00] 0.38 [0.00] 0.83 [1.00]

0.76 [1.00] 0.76 [1.00] 0.85 [1.00] 0.66 [1.00] 0.83 [1.00]

0.12 [0.00] 0.13 [0.00] 0.37 [1.00] 0.21 [1.00] 0.01 [0.00]

0.19 [0.00] 0.17 [0.00] 0.46 [1.00] 0.28 [1.00] 0.00 [0.00]

0.58 [1.00] 0.60 [1.00] 0.33 [0.00] 0.10 [0.00] 0.33 [0.00] 0.69 [1.00] 0.19 [0.00] 1,309

0.53 [1.00] 0.50 [1.00] 0.47 [0.00] 0.23 [0.00] 0.39 [0.00] 0.58 [1.00] 0.14 [0.00] 3,342

0.65 [1.00] 0.67 [1.00] 0.36 [0.00] 0.13 [0.00] 0.34 [0.00] 0.75 [1.00] 0.19 [0.00] 480

0.06 [0.00] 0.09 [0.00] -0.14 [0.00] -0.13 [0.00] -0.06 [0.00] 0.11 [0.00] 0.05 [0.00]

0.12 [0.00] 0.17 [0.00] -0.11 [0.00] -0.10 [0.00] -0.05 [0.00] 0.17 [0.00] 0.05 [0.00]

ED

SRI

Dual class Mean [Median] 0.79 [0.80] 0.61 [0.60]

34

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T

ACCEPTED MANUSCRIPT

SC

Panel B: Matched Sample SRI BRI Call special meeting

Act by written consent No poison pill

ED

No staggered board

MA

Shareholder rights provisions

Single class Mean [Median] 0.63 [0.60] 0.71 [0.71]

Dual-Single Mean [Median] 0.18*** [0.20***] -0.10*** [-0.11***]

0.80 [1.00] 0.80 [1.00] 0.85 [1.00] 0.67 [1.00] 0.94 [1.00]

0.66 [1.00] 0.66 [1.00] 0.50 [0.00] 0.44 [0.00] 0.91 [1.00]

0.13 [0.00] 0.15 [0.00] 0.36 [1.00] 0.22 [1.00] 0.04 [0.00]

0.58 [1.00] 0.59 [1.00] 0.30 [0.00] 0.10 [0.00] 0.32 [0.00] 0.69 [1.00] 0.17 [0.00] 913

0.48 [0.00] 0.50 [0.00] 0.41 [0.00] 0.23 [0.00] 0.38 [0.00] 0.53 [1.00] 0.15 [0.00] 913

0.10 [1.00] 0.09 [1.00] -0.11 [0.00] -0.13 [0.00] -0.06 [0.00] 0.16 [0.00] 0.02 [0.00]

NU

Corporate Governance

Dual class Mean [Median] 0.81 [0.80] 0.61 [0.60]

Cumulative voting rights

Board-related provisions

PT

All attend >75% of board meeting CEO serves on 2 or fewer outside boards

AC CE

Outside directors>50%

Nominating composed solely of outsiders Compensation composed solely of outsiders 5
Chairman and CEO are separated NObs

35

36

5
Compensation composed solely of outsiders

Nominating composed solely of outsiders

Outside directors >50%

CEO serves on 2 or fewer outside boards

All attend >75% of board meetings

Cumulative voting rights

No staggered board

No poison pill

Act by written consent

Call special meeting

Dual

0.064 (0.00)

Special 0.065 (0.00) 0.534 (0.00)

Written

0.193 (0.00) 0.222 (0.00) 0.220 (0.00)

No poison

0.104 (0.00) 0.300 (0.00) 0.312 (0.00) 0.295 (0.00)

No staggered

0.008 (0.26) 0.109 (0.00) 0.097 (0.00) 0.152 (0.00) 0.098 (0.00)

Cumulative

0.031 (0.00) -0.133 (0.00) -0.104 (0.00) -0.079 (0.00) -0.041 (0.00) -0.069 (0.00)

Attend

0.052 (0.00) -0.142 (0.00) -0.107 (0.00) -0.064 (0.00) -0.034 (0.00) -0.016 (0.01) 0.646 (0.00)

Serves

-0.075 (0.00) -0.157 (0.00) -0.130 (0.00) -0.170 (0.00) -0.068 (0.00) -0.042 (0.00) 0.566 (0.00) 0.586 (0.00)

Outdir

T

Compensation outdir -0.034 (0.00) -0.142 (0.00) -0.105 (0.00) -0.109 (0.00) -0.047 (0.00) -0.014 (0.04) 0.511 (0.00) 0.722 (0.00) 0.638 (0.00) 0.598 (0.00)

CR IP

Nominating outdir -0.079 (0.00) -0.134 (0.00) -0.108 (0.00) -0.110 (0.00) -0.032 (0.00) 0.028 (0.00) 0.359 (0.00) 0.495 (0.00) 0.528 (0.00)

Board size 0.065 (0.00) -0.144 (0.00) -0.105 (0.00) -0.089 (0.00) -0.070 (0.00) -0.056 (0.00) 0.722 (0.00) 0.711 (0.00) 0.638 (0.00) 0.398 (0.00) 0.543 (0.00)

Chairman& CEO separated 0.038 (0.00) -0.010 (0.13) -0.015 (0.03) 0.016 (0.02) -0.022 (0.00) -0.071 (0.00) 0.269 (0.00) 0.161 (0.00) 0.154 (0.00) 0.067 (0.00) 0.129 (0.00) 0.278 (0.00)

This table presents Pearson cross-correlation coefficients of dual class dummy indicator with the individual corporate governance provisions. All variables are defined in the Appendix. P-values are reported in parentheses.

ACTable 2 Cross-Correlation Coefficients CE PT ED MA NU S

ACCEPTED MANUSCRIPT

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Table 3 Relationship between Dual Class Status and Corporate Governance

SC

RI P

T

This table reports firm-level Probit regressions, where the dependent variable is a dual class dummy indicator and the key independent variable is shareholder rights index (SRI ), board-related index (BRI ), or an individual governance provision. Control variables include GIM (2009) dual class determinants; R&D/sales; ad expenditures dummy; M/B; capex/assets; total assets; market capitalization; leverage; firm age; external financing; asset intangibility; and sales growth rate. All variables are defined in the Appendix. Model 1 focuses on shareholder rights index, SRI ; Model 2 on board-related index, BRI ; Model 3 incorporates both indices; Model 4 focuses on individual governance provisions with inclusion of one variable at a time. All regressions include industry and year fixed effects, and all associated p-values reported in parentheses are computed based on standard errors adjusted for heteroscedasticity and firm-level clustering. NObs is the number of firm-year observations, and R¯2 is R-squared. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively. The sample period is from 1996 to 2006. 1 2.039*** (0.000)

BRI

Shareholder rights provisions Act by written consent

4

0.594*** (0.000) 0.497*** (0.000) 0.742*** (0.000) 0.525*** (0.000) 0.310* (0.062)

ED

No poison pill No staggered board

-1.029*** (0.000)

3 2.069*** (0.000) -1.159*** (0.000)

MA

Call special meeting

2

NU

SRI

Cumulative voting rights

Board-related provisions

Control variables

Yes

Yes

Yes

0.077 (0.482) -0.300 (0.137) -0.595*** (0.000) -0.431*** (0.000) -0.418*** (0.000) 0.320* (0.074) -0.038 (0.666) Yes

Industry FE

Yes

Yes

Yes

Yes

Year FE

Yes

Yes

Yes

Yes

Intercept

-12.046*** (0.000) 4,651

-8.547*** (0.000) 4,651

-11.065*** (0.000) 4,651

4,651

12.95%

10.55%

13.39%

PT

All attend >75% of board meetings

CEO serves on 2 or fewer outside boards

AC CE

Outside directors >50%

Nominating composed solely of outsiders Compensation composed solely of outsiders 5
Chairman and CEO are separated

NObs R¯ 2

37

T

ACCEPTED MANUSCRIPT

RI P

Table 4 Corporate Governance at Dual Class Firms by Wedge Portfolio

SC

This table presents means and medians (in brackets below mean values) of shareholder rights and of board-related indices, and proportions of firms with individual governance provisions across three wedge portfolios at dual class firms. Wedge is computed as voting rights minus cash flow rights. Portfolio 1 (3) reports governance values for the bottom (top) one third of firms with the lowest (highest) wedge. Statistical significance is reported based on p-values associated with the t -test for the difference in mean values and with Wilcoxon test for the difference in median values between Port f olio 3 and Port f olio 1. NObs is the number of firm-year observations. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively. The sample period is from 1996 to 2006.

Diff (3-1) 0.157*** [0.200]*** 0.005* [0.000]

0.630 [1.000] 0.628 [1.000] 0.704 [1.000] 0.481 [0.000] 0.824 [1.000]

0.667 [1.000] 0.726 [1.000] 0.700 [1.000] 0.581 [1.000] 0.811 [1.000]

0.746 [1.000] 0.751 [1.000] 0.841 [1.000] 0.660 [1.000] 0.865 [1.000]

0.116 [0.000] 0.123 [0.000] 0.137 [0.000] 0.179 [1.000] 0.041 [0.000]

0.630 [1.000] 0.692 [1.000] 0.388 [0.000] 0.102 [0.000] 0.379 [0.000] 0.811 [1.000] 0.198 [0.000] 449

0.719 [1.000] 0.715 [1.000] 0.421 [0.000] 0.158 [0.000] 0.439 [0.000] 0.849 [1.000] 0.285 [0.000] 456

0.687 [1.000] 0.680 [1.000] 0.316 [0.000] 0.106 [0.000] 0.302 [0.000] 0.746 [1.000] 0.185 [0.000] 404

0.057 [0.000] -0.012 [0.000] -0.072 [0.000] 0.004 [0.000] -0.077 [0.000] -0.065 [0.000] -0.013 [0.000]

NU

3 0.866 [1.000] 0.596 [0.571]

BRI

MA

SRI

Shareholder rights provisions

ED

Call special meeting

Act by written consent No poison pill

PT

No staggered board

Cumulative voting rights

AC CE

Board-related provisions

All attend >75% of board meetings CEO serves 2 or fewer outside boards Outside directors>50% Nominating composed solely of outsider Compensation composed solely of outsider 5
1 0.709 [0.800] 0.591 [0.571]

Wedge Mean [Median] 2 0.787 [0.800] 0.638 [0.667]

38

ACCEPTED MANUSCRIPT

T

Table 5 Firm Value at Dual Class Firms by Wedge and by Governance Port-

RI P

folio

1 1

2 3

2

AC CE

1 2 3 1

3

2 3

Difference (33-13)

Industry-adjusted LnQ Industry-adjusted LnQ Mean P-values NObs Difference BRI Mean P-values NObs Difference (3-1) [Median] (3-1) [Median] 0.118 (0.158) 182 Mean 1 0.024 (0.698) 109 Mean [-0.024] (0.320) 0.277* [0.000] (0.641) 0.199* -0.074 (0.039) 89 (0.086) 2 0.397 (0.001) 110 (0.058) [-0.106] (0.016) Median [-0.007] (0.206) Median 0.395 (0.000) 98 0.039** 3 0.223 (0.022) 120 0.016* [0.015] (0.012) (0.038) [0.016] (0.134) (0.055) 0.407 (0.000) 112 Mean 1 0.408 (0.000) 89 Mean [0.199] (0.001) 0.127** [0.195] (0.000) 0.227** 0.482 (0.001) 111 (0.032) 2 0.516 (0.000) 123 (0.028) [0.111] (0.008) Median [0.294] (0.000) Median 0.534 (0.000) 147 0.138* 3 0.635 (0.000) 147 0.046* [0.337] (0.000) (0.068) [0.241] (0.000) (0.094) 0.135 (0.245) 66 Mean 1 -0.020 (0.796) 98 Mean [-0.016] (0.721) 0.050* [-0.087] (0.067) 0.110** 0.267 (0.002) 106 (0.078) 2 0.245 (0.003) 136 (0.038) [0.071] (0.037) Median [0.070] (0.022) Median 0.185 (0.012) 204 0.016* 3 0.090 (0.325) 93 0.087 [0.000] (0.424) (0.077) [0.000] (0.743) (0.103) -0.134* (0.089) -0.075* (0.061) [-0.015]* (0.096) [0.010] (0.468)

ED

SRI

PT

Wedge

MA

NU

SC

This table presents means and medians (in brackets below mean values) of industry-adjusted ln Q across wedge and governance portfolios at dual class firms. Portfolio 1 (3) pertinent to wedge comprises the bottom (top) one third of firms with the lowest (highest) wedge. Portfolio 1 (3) pertinent to shareholder rights index, SRI , or board-related index, BRI , includes the bottom (top) one third of firms with the lowest (highest) shareholder rights or board-related governance, respectively. As such, Portfolio 11 (33) presents firm values for the bottom (top) one third of firms with the lowest (highest) wedge and the lowest (highest) SRI or BRI . P-values associated with the t -test for means and with the Wilcoxon test for medians are presented to the right of mean and median values. Statistical significance is reported based on p-values associated with the t -test for the difference in mean values and with Wilcoxon test for the difference in median values between Port f olio 3 and Port f olio 1. NObs is the number of firm-year observations. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively. The sample period is from 1996 to 2006.

39

ACCEPTED MANUSCRIPT Table 6 Relationship Between Firm Value and Corporate Governance at Dual

Class Firms

2

SC

1 -0.366 (0.346)

RI P

T

This table reports firm-level OLS regressions, where the dependent variable is industry-adjusted ln Q and the key independent variable is shareholder rights index (SRI ), board-related index (BRI ), or an individual governance provision. Control variables include cash flow rights; voting rights; squared terms of cash flow and of voting rights; total assets; firm age; Delaware incorporation indicator; insider ownership; ROA; capex/assets; leverage; and R&D/sales. All variables are defined in the Appendix. Model 1 focuses on shareholder rights index, SRI ; Model 2 - on board-related index, BRI ; Model 3 incorporates both indices; Model 4 focuses on individual governance provisions with inclusion of one variable at a time. All regressions include industry and year fixed effects, and all associated p-values reported in parentheses are computed based on standard errors adjusted for heteroscedasticity and firm-level clustering. NObs is the number of firm-year observations, and R¯ 2 is R-squared. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively. The sample period is from 1996 to 2006. SRI

Shareholder rights provisions Call special meeting No poison pill No staggered board Cumulative voting rights

1.029** (0.020)

ED

Board-related provisions

All attend >75% of board meetings

PT

CEO serves 2 or fewer outside boards Outside directors>50%

Nominating composed solely of outsiders

AC CE

Compensation composed solely of outsiders 5
Chairman and CEO are separated CFR

4

-0.166 (0.528) -0.290 (0.317) 0.210 (0.414) 0.053 (0.760) -0.800 (0.117)

MA

Act by written consent

NU

BRI

3 -0.343 (0.373) 1.014** (0.025)

0.156 (0.302) -0.477 (0.251) 0.321* (0.072) -0.076 (0.749) 0.212 (0.190) -0.419 (0.315) 0.216 (0.276)

-4.003 (0.169) 6.009 (0.192) 1.395 (0.377) -1.026 (0.412) Yes

-3.602 (0.194) 5.821 (0.196) 0.973 (0.487) -0.790 (0.489) Yes

-3.774 (0.180) 6.033 (0.181) 1.407 (0.345) -1.115 (0.352) Yes

Industry FE

Yes

Yes

Yes

Yes

Year FE

Yes

Yes

Yes

Yes

Intercept NObs

2.748*** (0.002) 358

1.657** (0.038) 358

1.832** (0.025) 358

358

R¯ 2

52.65%

53.59%

53.84%

CFR2

VR VR2 Control variables

40

Yes

ACCEPTED MANUSCRIPT

RI P

Class Firms: Employing Interaction Terms

T

Table 7 Relationship Between Firm Value and Corporate Governance at Dual

NU

SC

This table reports firm-level OLS regressions, where the dependent variable is industry-adjusted ln Q and the key independent variables are each of the following - High SRI , High BRI , Low SRI , Low BRI , as well as interaction terms among these variables. High (Low) SRI or BRI are based on the subsamples of top (bottom) one-third of firms by SRI or BRI . Control variables are the same as those in Table 6. All variables are defined in the Appendix. Model 1 focuses on High SRI and BRI ; Model 2 - on High SRI and Low BRI ; Model 3 - on High BRI and Low SRI ; and Model 4 on Low SRI and BRI . All regressions include industry and year fixed effects, and all associated p-values reported in parentheses are computed based on standard errors adjusted for heteroscedasticity and firm-level clustering. NObs is the number of firm-year observations, and R¯2 is R-squared. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively. The sample period is from 1996 to 2006. 1 0.134 (0.391) 0.323* (0.075)

High BRI Low SRI Low BRI

MA

High SRI

ED

High SRI×High BRI High SRI×Low BRI

-0.179 (0.561)

-0.773*** (0.002) 0.686* (0.058)

Low SRI×High BRI

PT

2 -0.106 (0.579)

Low SRI×Low BRI

3 0.276** (0.029) 0.288 (0.234)

-0.053 (0.824)

4

0.334 (0.158) -0.371** (0.043)

-3.599 (0.191) 5.740 (0.195) 0.889 (0.538) -0.662 (0.570) Yes

-3.232 (0.209) 5.243 (0.212) 0.784 (0.561) -0.594 (0.585) Yes

-3.844 (0.172) 5.882 (0.181) 1.274 (0.415) -0.903 (0.474) Yes

-0.492 (0.214) -3.240 (0.206) 5.215 (0.204) 1.013 (0.477) -0.767 (0.508) Yes

Industry FE

Yes

Yes

Yes

Yes

Year FE

Yes

Yes

Yes

Yes

Intercept NObs

2.271*** (0.009) 358

2.271*** (0.005) 358

1.890** (0.034) 358

1.827** (0.032) 358

R¯ 2

53.24%

54.67%

53.66%

55.07%

AC CE

CFR

CFR2

VR

VR2

Control variables

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Table 8 Corporate Governance Changes at Dual Class Firms around Unifica-

RI P

tion Events

SRI BRI

Shareholder rights provisions Act by written consent

AC CE

Board-related provisions

All attend >75% of board meetings

CEO serves less or equal 2 outside boards Outside directors>50%

Nominating composed solely of outsider Compensation composed solely of outsider 5
t+3 Mean [Median] 0.63 [0.67] 0.71 [0.70]

t+5 Mean [Median] 0.60 [0.67] 0.72 [0.70]

Difference (-3,+3) Mean [Median] -0.13*** [-0.16]*** 0.04** [0.03]**

Difference (-5,+5) Mean [Median] -0.11*** [-0.16]*** 0.06*** [0.03]***

0.69 [1.00] 0.66 [1.00] 0.73 [1.00] 0.57 [1.00] 0.79 [1.00]

0.68 [1.00] 0.64 [1.00] 0.73 [1.00] 0.59 [1.00] 0.80 [1.00]

0.51 [1.00] 0.53 [1.00] 0.53 [1.00] 0.46 [0.00] 0.79 [1.00]

0.51 [1.00] 0.52 [1.00] 0.54 [1.00] 0.45 [0.00] 0.81 [1.00]

-0.17 [0.00] -0.11 [0.00] -0.20 [0.00] -0.13 [-1.00] -0.01 [0.00]

-0.18 [0.00] -0.14 [0.00] -0.19 [0.00] -0.12 [-1.00] 0.02 [0.00]

0.73 [1.00] 0.70 [1.00] 0.38 [0.00] 0.04 [0.00] 0.33 [0.00] 0.86 [1.00] 0.27 [0.00] 209

0.70 [1.00] 0.75 [1.00] 0.40 [0.00] 0.05 [0.00] 0.38 [0.00] 0.84 [1.00] 0.27 [0.00] 209

0.55 [1.00] 0.66 [1.00] 0.45 [0.00] 0.28 [0.00] 0.45 [0.00] 0.69 [1.00] 0.18 [0.00] 209

0.55 [1.00] 0.65 [1.00] 0.45 [0.00] 0.29 [0.00] 0.46 [0.00] 0.66 [1.00] 0.19 [0.00] 209

-0.15 [0.00] -0.09 [0.00] 0.05 [0.00] 0.23 [0.00] 0.07 [0.00] -0.15 [0.00] -0.09 [0.00]

-0.18 [0.00] -0.05 [0.00] 0.07 [0.00] 0.25 [0.00] 0.13 [0.00] -0.20 [0.00] -0.08 [0.00]

PT

No poison pill Cumulative voting rights

t-3 Mean [Median] 0.76 [0.83] 0.67 [0.67]

ED

Call special meeting

No staggered board

t-5 Mean [Median] 0.71 [0.83] 0.66 [0.67]

MA

Corporate Governance

NU

SC

This table presents 3- and 5-year means and medians (in brackets below mean values) of shareholder rights index, boardrelated index, and of individual governance provisions before and after unification events. We also report difference tests for 3- and for 5-year governance values from before to after unification events. All variables are defined in the Appendix. Statistical significance is reported based on p-values associated with the t -test for the difference in mean values and with Wilcoxon test for the difference in median values. NObs is the number of firm-year observations. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively. No statistical significance is presented for individual governance provisions computed as proportions of firms with such provisions. The sample period is from 1996 to 2006.

42

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RI P

Table 9 Unification Likelihood and Corporate Governance

NU

SC

This table reports firm-level Probit regressions, where the dependent variable is unification dummy indicator and the key independent variables are individual governance provisions with inclusion of one variable at a time. Control variables include insider ownership; M/B; capex/assets; firm size; leverage; and sales growth rate. All variables are defined in the Appendix. All regressions include industry and year fixed effects, and all associated p-values reported in parentheses are computed based on standard errors adjusted for heteroscedasticity and firm-level clustering. NObs is the number of firm-year observations. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively. The sample period is from 1996 to 2006. Shareholder rights provisions Call special meeting

MA

Act by written consent No poison pill

No staggered board

ED

Cumulative voting rights

Board-related provisions

All attend >75% of board meetings

PT

CEO serves on 2 or fewer outside boards Outside directors>50%

AC CE

Nominating composed solely of outsiders Compensation composed solely of outsiders 5
-0.387 (0.298) -0.901*** (0.002) -0.282** (0.040) -0.359 (0.336) -0.403 (0.379) -0.277 (0.468) -0.462 (0.286) 0.596** (0.046) 0.054 (0.911) 0.067 (0.846) -0.343 (0.668) 0.284 (0.422)

Control variables

Yes

Industry FE

Yes

Year FE

Yes

NObs

840

43