Which Monitors Monitor the Most? Dual-Stock Structure, Analyst Following, and Corporate Governance

Abstract

We examine the effects of internal and external corporate governance and monitoring mechanisms on the choice of dual-class status and the firm performance of dual-class firms. Employing 736 dual-class firms and 7,027 single-class firms during the period 1996-2002, we find that dual-class firms tend to be larger, and have higher director ownership, higher institutional ownership, lower blockholdings, and a smaller fraction of independent, outside directors on their boards than single-class firms. In addition, we observe that dual-class firms are followed by a smaller number of security analysts. After correcting for endogeneity bias, our regression results show that not only firms with higher analyst coverage, but also firms with higher analyst following and a lower wedge, measured as the difference between voting rights and cash flow rights, or lower managerial entrenchment are strongly associated with Tobin's q. In contrast, blockholders' ownership, board independence, and institutional ownership play a relatively insignificant role in enhancing Tobin's q. We interpret these results to mean that security analysts are the most effective monitoring mechanism that influence both the dual-class choice and firm performance. Our results are not attributed either to the difference in firm size or to an industry effect.