The Importance of Tag Along Rights and Identity of Controlling Shareholders for the Price Spreads Between Dual-Class Shares: The Brazilian Case

Abstract

This paper analyzes the determinants of the differential pricing of equity classes (voting and non-voting shares) or the so-called dual-class premium (DCP) in Brazil from 1995 to 2006 with a focus on two specific corporate governance aspects: i) the granting of tag along rights, a mandatory bid rule that extends minority shareholders the right of selling their shares for a minimum percentage of the price paid for controlling shareholders’ shares in case of a control transfer; and ii) the identity of the controlling shareholders, with an emphasis on family control. We examined 87 Brazilian listed firms throughout the period, resulting in a sample of 3,287 observations. We find empirical evidence that changes in Corporate Law that decreased (increased) the advantage of voting shares in terms of tag along rights reduced (incremented) DCP. However, we do not find empirical evidence that the voluntary granting of tag along rights altered DCP. We also find evidence suggesting that family control is positively associated with DCP level. Overall, our results indicate that regulations regarding shareholders’ rights and the identity of controlling shareholders are the two relevant corporate governance variables for DCP level in environments characterized by agency problem Type II.