Differential Voting Rights Research Articles

Differential voting rights in listed companies in Denmark and Sweden – to be challenged or boosted by harmonization?

Differential voting rights in listed companies in Denmark and Sweden – to be challenged or boosted by harmonization?

An Impact of Default Risk and Promoters’ Holding on the Dividend Policy in the Firms in India: Evidence using Panel Data

Dividends, as a policy is still a matter of debate. This situation is due to both, lack of consensus in the literature and self-evolution of corporate finance worldwide. Therefore, this study is an attempt to provide insights of the contemporary dividend policy and its driving forces. We collect the panel data from 78 non-financial Indian firms from BSE-100 (BSE-100 is a leading index of Indian companies by Bombay Stock Exchange) from 2015-2019. We decide to test how dividends are driven by default risk, ownership concentration (OC) and profitability of the firms. Profitability is used as moderator to the association of default risk with the dividends. We get startling evidence that OC and profitability do not influence the dividends policy in the firms in India. Default risk negatively impacts the dividends. However, the absolute value of the coefficient is too small and hence can be ignored. Furthermore, we find evidence that dividends are consistent despite the situation of profitability and OC. This finding is one of the main contributions of the study. We recommend to have differential voting rights (DVR) shares to cater to varying aspirations of different investors. Empirical evidence of findings of the study would be an eye-opener to the managers, which is one of the major implications of the current study. Additionally, change of the policies on the DVR shares is another major implication of the study.

Dual Class Shares and Firm Valuation: Evidence from SEC Rule 19c-4

In the 1980s, stock exchanges and eventually, the SEC took actions that affected the eligibility of listed firms to adopt dual classes of shares with differential voting rights. We find that risk-adjusted stock returns increase (decline) significantly on days surrounding such actions that increase the probability of banning (allowing) dual-class shares. The stock market reaction varies across firms systematically suggesting that there is a negative view of dual classes in firms with entrenched managers and is viewed somewhat positively when there is a benefit to protecting management. Dual-class structures do not harm shareholders in very young firms.

Determinants of Differential Voting Rights Share Prices and Ordinary Share Prices : Evidence from Dual-Class Companies in India

We analyzed the effects of Indian factors namely, Nifty index, Volatility index (VIX), and Economic Policy Uncertainty Index (EPUI) and United States of America (USA) factors such as S&P 500 Index, CBOE VIX, and EPUI on differential voting rights (DVRs) share prices and ordinary share prices of three dual-class companies in India during the monthly period from January 2012-August 2019 using quantile regression approach. We found quite interesting and useful results. In case of dual-class shares of Jain Irrigation Systems, DVR share prices were significantly influenced by Nifty and S&P 500. In contrast, USA VIX and Indian & USA EPUI had less impact on DVRs. We noticed an insignificant dependence between India VIX and DVRs across different quantiles. Further, impact of Nifty, S&P 500, India VIX, USA VIX, and USA EPUI on ordinary share prices varied across the quantiles; whereas, India EPUI had no influence on ordinary shares' prices. Regarding dual-class shares of Tata Motors, Nifty and S&P 500 had a significant impact on DVRs. However, DVRs were less sensitive to rest of the factors. For ordinary share prices, S&P 500 had a significant influence. However, the effects of other variables on ordinary share prices were not uniform across the quantiles. With respect to dual-class shares of Future Enterprises, both DVRs and ordinary share prices were highly affected by all the variables, except ordinary share prices were not exposed to India VIX.

Walmart’s Acquisition of Flipkart: Emerging Paradigm of the Digital Era

The case is set around the acquisition of majority shares of Flipkart by Walmart. The case traces the evolution of Flipkart as a startup and explores the context of acquisition by Walmart as well as the strategic fit between the two firms. Technological changes—mainly the proliferation of internet, mobile technology and the consequent digitization—have irretrievable impacts on the retail segment in terms of convergence of on-line and off-line retail and globalization of the markets. The case explores the emerging digitization scenario and its impact on the retail segment as a trigger to the merger process. Flipkart as an Indian startup had to re-incorporate outside India due to policy restrictions on fundraising. The case points to the inadequacies in the Indian policy regime with respect to startup fundraising and differential voting rights. Based on international comparisons, the case triggers discussion on the directions to policy changes if India hopes to create a congenial start-up ecosystem and if the dream of Digital India is to be achieved.

Differential Voting Right Shares in India - Legal and Valuation Perspective

In India, a company can only issue DVR, a.k.a. Differential Voting Rights, shares that offer fewer voting rights than ordinary shares of the same company. The holders of the equity shares with differential rights enjoy all other rights such as bonus shares, rights shares etc., which the holders of ordinary equity shares are entitled to Ideally, the movement in the two shares, i.e. ordinary share and DVR share, should mirror each other. However in India, on an average, only 63.83% of the returns of DVR shares is explained by returns of the ordinary shares. The legal environment is the key factor in explaining differences across countries and the voting premium is smaller in countries with better legal protection for minority and non-voting stockholders and larger for countries without such protection. Considering the strict corporate governance requirements for Companies to list dual-class shares in India and the various laws protecting the rights of DVR shareholders against hostility, it can be argued that the discount of 35-45% for DVR shares is a bit excessive.

Dual class shares – is India ready for it?

Market evidence suggest that a class of common stock with superior voting rights trades at systematically higher prices than an identical class of stock with inferior voting rights, as control over the firm grants the promoters some opportunity to receive a higher payoff. Differential voting rights class of shares may attract a certain class of investors who are only interested in the economic benefits of a company. It assists management in deterring potential rivals from winning a control and allows raising fresh capital for growth without giving up control. The value of controlling a firm derives from the fact that you believe that you or someone else would operate the firm differently from the way it is being run currently. Differential voting rights shares in different countries have indicated that voting rights are generally worth between 10% and 20% of the value of common stock. This article intends to create awareness about differential voting rights shares, to study the international as well as domestic experience and tries to examine the various factors that affect differential voting rights share prices.

Large shareholder diversification, corporate risk taking, and the benefits of changing to differential voting rights

We show how the change to differential voting rights allows dominant shareholders to retain control even after selling substantial economic ownership in the firm and diversifying their wealth. This unbundling of cash flow and control rights leads to more dispersed economic ownership and a closer alignment of dominant and dispersed shareholder interests. When insiders sell sizeable amounts of their economic interests, firms increase capital expenditures, strengthen corporate focus, divest non-core operations, and generate superior industry-adjusted performance. The change to differential voting rights both fosters corporate control activity and creates higher takeover premiums that are paid equally to all shareholders.

Large Shareholder Diversification, Corporate Risk Taking, and the Benefits of Changing to Differential Voting Rights

We show how the change to differential voting rights allows dominant shareholders to retain control even after selling substantial economic ownership in the firm and diversifying their wealth. This unbundling of cash flow and control rights leads to more dispersed economic ownership and a closer alignment of dominant and dispersed shareholder interests. When insiders sell sizable amounts of their economic interests, firms increase capital expenditures, strengthen corporate focus, divest non-core operations, and generate superior industry-adjusted performance. The change to differential voting rights both fosters corporate control activity and creates higher takeover premiums that are paid equally to all shareholders.

Tata Motors Dual Capitalization

The case documents the issue of differential voting rights shares by a prominent automotive manufacturer in India. Students are asked to evaluate the motives and economic impact of the issue.

Indian Takeover Regulation - Under Reformed and Over Modified

The takeover of substantial number of shares, voting rights or control in a listed Indian company attracts the provision of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The regulations have been amended nearly 20 times since inception, though the amendments have mainly concentrated on areas which needed no amendment. At the same time a vast number of obvious problems have not been rectified in the regulations. The large number of amendments have also created requirement of a compulsory tender offer of such unnecessary complexity as to make it virtually unintelligible to even a well qualified professional.This paper argues that the complexity in the trigger points for disclosure and tender offer introduced over the years lacks a philosophy, and most of the amendments can not only be deleted but a very simple structure can be introduced making compliance of the regulations straight forward and easy to understand by management of listed companies. Certain other areas which need amendments have also been discussed. Chief amongst these are the provisions relating to consolidation of holdings, conditional tender offers, hostility to hostile acquisitions, definitional oddities, payment of control premium in the guise of non compete fees, treatment of differential voting rights, treatment of Global Depository Receipts and disclosure enhancements.This paper does not try to portray a particular combination of numbers as the best possible set of trigger points and compulsory acquisition numbers but advocates that whatever numbers are adopted should not be changed for several decades. Arguments that state that the changing economic condition requires constant changes with these numbers, it is argued is wrong.

Product Market Competition and Earnings Management: Some International Evidence

We provide international evidence that industries with increased intensity of import penetration and lower price-cost margins induce insiders of firms in these industries to more aggressively manage earnings. We interpret this result to be consistent with the explanation that competition reduces the firm’s profitability and the aggressive earnings management may stem from managerial desire to distort true economic performance. Doing so enables the manager to protect a portion of his or her private control benefits. To confirm the plausibility of this explanation, we correlate our earnings management proxies with a widely used measure of private benefits i.e. the voting premium between shares with differential voting rights. We find a strong positive correlation between the voting premium and our earnings management proxies. This helps us strengthen the likelihood of the private benefits hypothesis relative to other alternative explanations. We also confirm the findings of prior research that competition mitigates managerial private benefits of control. However, this effect is found to be less pronounced in firms that aggressively manage earnings. We interpret this result to be consistent with the possibility of competition to more likely reveal inefficiencies or funds diversion in low earnings management firms relative to high earnings management firms. JEL Classification: F30; G30; G15; M41. 1 Corresponding author: 315 Gerson Hall, P. O. Box 117166, Gainesville, FL 32611-7166. Tel: 352-273-0211. Fax: 352-273-0200. Email: surjit.tinaikar@cba.ufl.edu. We thank Craig Doidge for facilitating access to his database on international dual class share firms.

Claims on Equity: Voting and Liquidity Differentials, Cash Flow Preferences and Financing Rights

In conventional valuation, we assume that all equity claims are identical and divide the value of equity by the number of claims (shares) to get the value per claim (share). In practice, though, claims on equity can vary on a number of dimensions. First, the claim can be a direct and perpetual one (standard equity) or it can be contingent on the value changing (equity option). Second, some equity investors have preferential claims on the cash flows- dividends in some cases and cash flows in liquidation in other cases. Third, some equity claims have superior control rights over other claims: this can take the form of differential voting rights in some cases and a bigger role in board composition and management in others. In some instances, the power is triggered by a control event such as an acquisition or an initial public offering. Fourth, some equity investors are provided with special rights to protect their interests when the firm acts in later periods. These can include disproportionate rights in subsequent financing decisions - the right to partake in the financing at a fixed price, for instance, or veto rights over new financing - as well as redemption rights, where they can reclaim the capital that they have invested. Finally, equity claims can vary in terms of liquidity, with some claims being more marketable than others. All of these differences can affect value, resulting in some equity claims having higher value than others.

Mean Reversion between Different Classes of Shares in Dual-Class Firms: Evidence and Implications

This paper analyzes the stocks with differential voting rights in the world for fractional cointegration. In the United States, I find that out of 101 firms with at least two classes of stocks traded publicly, 81 (80%) are fractionally cointegrated. The mean (median) estimated long-memory parameter of the equilibrium is 0.61 (0.65) and is negatively correlated with the quality of the firm's corporate governance. The fractional cointegration among dual-class shares implies mean-reverting residual process if long-memory parameter is less than 1. It also implies predictability of future returns using the past prices. A simple long-short strategy based on the cointegration regression residuals yields substantial abnormal returns, even after controlling for market, size, book-to-market, momentum, liquidity, and investor sentiment. Extending the analysis to the rest of the world, I find that out of 788 firms with dual-class shares traded publicly, 470 (60%) are fractionally cointegrated. The long-memory parameter for a country is negatively correlated with quality of its investor protection.

Competition and Private Benefits of Control

This paper investigates the impact of competition on private benefits of control (PBC). To test for the effect of competition on private benefits, we use two indexes that measure the level of product and input market anti-competitive regulations. We estimate PBC using the voting premia between shares with differential voting rights. Using a panel dataset of 586 firms in 16 countries, our main findings are three. First, within-country increases in the intensity of competition lead to lower estimates of private benefits of control. Second, competition significantly reduces the dispersion in private benefits. Third, the reduction in the level and dispersion of PBC that result from competition are particularly prominent in weak-rule-of-law countries, in manufacturing industries and in less-profitable firms. Overall, our results suggest that product market competition can help in curbing private benefits of control.

Do Voting Rights Affect Institutional Investment Decisions? Evidence from Dual-Class Firms

We examine whether, and to what extent, shareholder voting rights affect institutional investment decisions. Our analysis compares institutional investment in dual-class firms, where multiple share classes carrying differential voting rights allow insiders to control the firm and leave outside investors with little or no control rights, to that in single-class firms, where each share carries one vote. We find that institutional ownership in dual-class firms is significantly lower than it is in single-class firms after controlling for other determinants of institutional investment. Although institutions of all types hold less of the shares of dual-class firms, this avoidance is more pronounced for long-term investors with strong fiduciary responsibilities than for short-term investors with weak fiduciary duties. Following the unification of dual-class shares into a single-class, institutional investors increase their shareholdings in the unifying firm. Overall, our results suggest that voting rights are an important determinant of institutional investment decisions.

Determinants of the Differential Pricing between Voting and Non-Voting Shares in Brazil'

Several papers suggest that private benefits can explain the differential pricing between share classes with differential voting rights. However, in Brazil the price differential between voting and non-voting shares has been negative for several companies between July 1994 and September 2002. This paper investigates the determinants that imply this discount of voting shares vis-à-vis non-voting shares. Particularly, the paper analyzes the impacts of liquidity, dividend differential, and recent changes in legislation of the Brazilian public equity market on the voting premium. This paper ratifies that liquidity is extremely relevant to the determination of relative prices. In addition, empirical evidence confirms a negative impact of Law 9457 - revoking voting minority shareholders' tag along rights - and a positive impact of the introduction of Law 10303 - reinstating those rights to minority voting shareholders. Finally, ownership structure confirmed a positive relationship with the voting premium, but the major shareholders' voting share participation has not presented a significant relationship as in other countries.

The source of value of voting rights and related dividend promises

This paper examines the relative share pricing of 98 firms with two classes of common stock trading in the United States from 1984 to 1999. The firms feature common stock classes with differential voting rights and, in some cases, differential rights to dividends. The observed voting premiums are higher than those reported in previous studies of U.S. firms and are dependent on the form of dividend promise to the low-vote shareholder. The voting premium is higher in the presence of a control threat, when insiders do not hold controlling voting power, and during periods of poor firm performance.

The Structure of Corporate Control and Ownership in a Regulatory Environment Unbiased toward One‐Share‐One‐Vote*

This paper seeks to identify the determinants of corporate ownership and control that emerge in regulatory environments which do not inhibit the issue of shares with differential voting rights and/or the establishment of pyramid holding companies (which serve exactly the same purpose). [Methodologically, the paper follows the seminal study of the US corporate structure by Demsetz & Lehn (1985).] Such settings tend to produce very concentrated control structures, which contrast sharply with those of the USA, the UK and Australia, where the distribution of shareholder votes in the large public corporations is relatively diffuse. Relatively lenient listing regulations have produced in South Africa a corporate landscape dominated by pyramid holding companies and multilayered diversified corporate groupings. These structures have effectively concentrated the control of most of the large public companies in the hands of a few entrepreneurial families (as well as the two large life insurance mutuals). This setting has enabled us to advance and test hypotheses about control and ownership which would be more difficult to test in a US, UK or Australian setting. Almost all the companies in our sample were found to be under the absolute control of a single identifiable shareholder coalition (usually one or two families) but the underlying percentage shareholding of the controlling group in each company was found to vary dramatically and systematically. We sought to explain that variation and to identify the role of the market as a constraint on the ability of controlling shareholders who wish to dilute their equity stake without surrendering control for the purpose of expanding their companies (without incurring additional debt) and/or diversifying their personal wealth. Demsetz & Lehn had already identified the factors that determine the demand by shareholders for equity dilution but not those constraining their ability to do so. This paper, therefore, attempts to shed light on the way in which principal/agent problems affecting shareholders and managers are resolved when one‐share‐one‐vote is neither enforced nor encouraged by the regulatory environment.

Ownership of equity in dual-class firms

The paper investigates the hypothesis that large shareholders use shares with differential voting rights for the purpose of expropriating minority shareholders. Consistent with several theoretical arguments but inconsistent with the expropriation hypothesis, we find that large shareholders own much more equity than required for control. We also show how the law can construct a regulation which reduces the opportunity for expropriation and at the same time allows for the possible benefits of differential voting rights.