Dual-class firms and governance: an acquisition perspective

Abstract

Purpose – The purpose of this paper is to examine the impact of governance quality on firms with multiple voting structures. Design/methodology/approach – The sample includes 487 acquisitions undertaken by dual-class firms from 1996 to 2009. The author used event studies (Patell, 1976) for short-term performance analysis around merger announcement dates; Berkovitch and Narayanan (1993) methods to identify the motive behind these transactions; and standard benchmark adjusted return on assets (and return on sales) (Barber and Lyon, 1996) and BHAR (Mitchell and Stafford, 2000) to analyze long-term post-acquisition performance. Findings – First, dual-class acquirers with better governance quality show stronger performance around takeovers which indicates that these firms make better acquisition decisions. These results hold even after controlling for different firm and deal characteristics. Second, transactions undertaken by acquirers with good governance show little or no sign of agency motive. This reinforces the findings in first. Third, the author reports that acquirers with above-median governance quality display stronger long-term post-acquisition operating as well as stock performances. These results are robust to different benchmarks used for this study. Originality/value – This paper expands the literature on dual-class firms by showing the impact of governance quality on acquisition activities undertaken by these firms. This is the first study to show that despite agency issues inherent in the dual-class structure, improving governance quality would have a positive impact, at least in the case of corporate takeovers.