At the Origins of the Non-Voting Shares’ Discount: Sentiment vs. Fundamentals

Abstract

In the U.K., between 1955 and 1970, dual class shares went from being popular to be nearly dismissed without any regulatory intervention. We show that the time-series decline in the use of dual class shares is positively correlated with alternative measures of the relative valuations of one-share-one-vote and dual class firms. Following periods with high relative valuations of one-share-one-vote, one-share-one-vote firms exhibit lower returns than dual class firms suggesting that the latter were undervalued. The relative valuations of single and dual class firms appear correlated with the tone of a debate on dual class shares in which no new material information was revealed. We perform a battery of tests suggesting that investor demand may have affected firms’ willingness to maintain existing dual class share structures.