Effect of Disproportional Voting Rights on Firm’s Market Performance: Evidence from Chinese Firms Cross-Listed on U.S. Exchanges

Muhammad Shah,Jia’Nan Zhou

doi:10.3390/ijfs5030019

Abstract

Dual-class firms face great criticism as it is believed that firms choose this structure to expropriate minority shareholders’ wealth. We compare market performance of Chinese dual-class firms with their single-class counterparts by constructing a list of Chinese firms cross-listed on U.S. exchanges. We find, contrary to the literature, that Chinese dual-class firms are outperforming in terms of market performance measured by Tobin’s Q, P/E ratio, and abnormal return in both subsequent years after the initial public offering (IPO). The reason for contrary results is that Chinese dual-class firms bond themselves to high U.S. standards from low local Chinese standards, and it is evident from the literature that when a firm bonds itself to high standards it shows a credible commitment towards minority shareholders’ rights, as well as focus on upright performance rather than investing in value-destroying projects and competes to survive in the market that imposes the high standards.

Highlights

The dual-class structure is a controversial way of accessing capital markets as it deviates from the “one share-one vote” regime that is commonly used by firms
We observe that dual-class firms underperform before initial public offering (IPO), improve in the first year, and outperform in the second year after IPO compared to single-class counterparts in terms of operating performance measured by ROA and EPS
We witness that dual-class firms outperform single-class firms in terms of market performance measured by P/E ratio, Tobin’s Q, and abnormal stock return

Summary

Introduction

The dual-class structure is a controversial way of accessing capital markets as it deviates from the “one share-one vote” regime that is commonly used by firms. We study a sample of Chinese firms cross-listed on U.S exchanges and we use this dataset to compare the market performance of single-class vs dual-class firms. Contrary to literature, that dual-class firms of China outperform single-class firms in terms of Tobin’s Q, abnormal returns, and P/E ratio. Contrary to the literature, that Chinese dual-class firms are outperforming single-class firms in terms of market performance as measured by P/E ratio, Tobin’s Q, and abnormal stock returns in both years after IPO, whereas the literature suggests that investors attach low value to dual-class firms as investors perceive that insiders entrench management to expropriate minority shareholders’ wealth (Claessens et al 2000; Lins 2003; Yeh and Woidtke 2005; Baulkaran 2014). The last section concludes the paper with recommendations for future researchers

Literature Review

Findings

Discussion of Results

Conclusions