Dual-class share structure and firm risks

Abstract

While costs associated with dual-class share ownership structures are widely documented, the benefits are seldom studied in the literature. We present evidence that a dual-class share structure promotes corporate risk-taking by providing insulation to insiders, such as management and controlling shareholders, from short-term market pressure. We then show that dual-class shares increase the market valuation of firms with high corporate risks, in contrast to the finding in the literature that a dual-class share structure is associated with lower valuation and performance. To provide a possible channel through which dual-class firms can increase corporate risk-taking, we find that dual-class firms are more likely to engage in mergers and acquisitions (M&As), especially non-diversifying M&As. We address endogeneity concerns by using a sample of share unifications and show that when dual-class firms change to single-class status, their corporate risks decrease.