The relevance of tag along rights and identity of controlling shareholders for the price spreads between dual-class shares: the brazilian case

Richard Saito,Alexandre Di Miceli Da Silveira

doi:10.1590/s1807-76922010000100002

Richard Saito, Alexandre Di Miceli Da Silveira

Open Access

https://doi.org/10.1590/s1807-76922010000100002

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Abstract

This paper analyzes the determinants of the differential pricing of equity classes (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 to minority shareholders the right to sell their 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 found empirical evidence that changes in Corporate Law decreased (increased) the advantage of voting shares in terms of tag along rights reduced (incremented) DCP. However, we did not find empirical evidence that the voluntary granting of tag along rights altered DCP. We also found 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 concentrated ownership structures.

Highlights

Two different equity classes of a single firm with the same cash-flow rights but different voting rights should lead to equal pricing(1)
These empirical results are explained by two main arguments: 1) that controlling shareholders can extract private benefits of control; and 2) that voting shares could be important in a takeover contest, seizing a fraction of the premium to be paid by eventual acquirers(3)
Caprio and Croci (2008, p. 5) summarize this discussion, arguing that wellestablished literature suggests that the main determinants of the price differential between voting and non-voting shares are the presence of private benefits of control and the probability that the incumbent will be dispossessed of control by someone who accumulates a larger voting block

Summary

Introduction

Two different equity classes of a single firm with the same cash-flow rights but different voting rights should lead to equal pricing(1). A series of theoretical and empirical studies have shown that a price premium (the so called voting premium or VP) could exist for voting shares over non-voting shares of a single firm(2). These empirical results are explained by two main arguments: 1) that controlling shareholders can extract private benefits of control (which would lead to a positive relation between the amount of these private benefits and VP); and 2) that voting shares could be important in a takeover contest, seizing a fraction of the premium to be paid by eventual acquirers(3) (which would lead to a positive relationship between the probability of voting shares being important for acquirers and VP). The differential pricing between voting and non-voting shares would be solely due to the probability of extraction of private benefits of control and to the difference of some observable rights attached to different equity classes (such as different dividends, mandatory bid rule, liquidity differentials, etc.)

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