Voting Premium Research Articles

Staggered Boards and the Value of Voting Rights

Abstract This paper examines the impact of staggered boards on the value of voting rights (i.e., the voting premium) estimated using option prices. We find companies with staggered boards have a higher voting premium. Exploiting plausibly exogenous court rulings, we confirm that weakening the effectiveness of staggered boards decreases the voting premium. Given that the voting premium reflects private benefits consumption and associated managerial inefficiencies, our findings are consistent with the entrenchment view of staggered boards. Analyzing the cross-sectional heterogeneity in our sample, we find the entrenchment effect of staggered boards to be particularly pronounced for firms in noncompetitive industries and for mature firms. (JEL G13, G30, G34, K22)

The Voting Premium

This paper develops a unified theory of blockholder governance and the voting premium. It explains how and why a voting premium emerges in the absence of takeovers and controlling shareholders. The model features a minority blockholder and dispersed shareholders who trade shares in a competitive market. Those who own shares after trading vote on a proposal at a shareholder meeting. A voting premium can emerge in equilibrium from the blockholder's desire to influence who exercises control, rather than from exercising control himself. We show that the voting premium is unrelated to measures of voting power and that empirical measures of the voting premium generally do not reflect the economic value of voting rights. Consistent with recent empirical studies, the model can generate a negligible voting premium even when the allocation of voting rights is important. The model can also explain a negative voting premium, which has been documented in several studies. It arises because of free-riding by dispersed shareholders on the blockholder's trades. Finally, the model has novel implications for the liquidity of voting vs. non-voting shares, the relationship between the voting premium and the price of a vote, competition for control among blockholders, the block premium, and corporate influence more generally. The Online Appendix can be accessed at https://www.nadyamalenko.com/VotingPremium_OnlineAppendix.pdf

Flights-to-control: Time variation in the value of a vote

Dual-class shares often violate the ‘one share-one vote’ principle, thereby creating the potential for agency problems. We develop a model of time-variation in the pricing of these agency problems, as reflected by the voting premium. A key implication of this model is that insiders face a trade-off between the private benefits of control and the value of their cash-flow claims on the firm, resulting in a negative relationship between the voting premium and the expected present value of firm cash flows. As predicted by this model, we report empirical evidence consistent with ‘flights-to-control’, where the voting premium increases substantially during financial crises and when negative earnings surprises are announced. These relationships are accentuated for firms where agency problems might be expected to be more pronounced. The average voting premium is also shown to decrease around events that reduce the ability for insiders to extract private benefits of control.

Positive or negative voting premium: What happened to private benefits in Italy?

A large body of research deals with voting premium as a proxy of private benefit of control. Almost all of them find positive voting premium, in particular in Italy. Therefore appears interesting to ask what is the current status of private benefits of control in Italy in the last decade (2007-2017). Surprisingly, we show three major findings: i) reduction of non-voting share in the Italian scenario; ii) prevalence of negative voting rights premium more than positive ones, thus conflicting with the assumption and the observations by other researchers; iii) limits of the voting premium method. Our aim is that this study, despite its limitations, may encourage further researches focused on the analysis of the improvement and the change in the Italian corporate governance. The article points out that interesting evidence already exists, although still much remains to do in the future.

What Accounts for the Union Member Advantage in Voter Turnout? Evidence from the European Union, 2002-2008

Across countries, union membership and voter turnout are highly correlated. In unadjusted terms, union members maintain a roughly 0.10 to 0.12 point gap in voting propensity over non-members. We motivate empirically and propose a model—with three causal channels—that explains this correlation and then empirically tests for the contribution of each channel to the overall union voting gap. The first channel by which union members are more likely to vote is through the so-called "monopoly-face" of unionism (i.e., unionization increases wages for members and higher incomes are a significant positive determinant of voting). The second is the so-called "social custom" model of unionism, which argues that union co-worker peer pressure creates incentives to vote amongst members for the purpose of having cast a ballot or being seen at the voting poll. The third and final channel is based on the "voice-face" of unionism whereby employees who are (or have been) exposed to the formalities of collective bargaining and union representation at the workplace are also more likely to increase their attachment to structures of democratic governance in society as well. We test to see how much of the raw "union voting premium" is accounted for by these three competing channels, using contemporary data from 29 European countries. We find that all three channels are at work, with voice the dominant effect (half of the overall gap attributed to this channel) and the other two (monopoly and social custom), each accounting for approximately one-fourth of the overall union voting gap.

Investor Protection and the Value of Shares: Evidence from Statutory Rules Governing Variations of Shareholders' Class Rights in an Emerging Market

This article uses a quasi-experimental framework provided by recent changes in Russian corporate law to study the effect of investor protection on the value of shares. The legal change analyzed involves the empowerment of nonvoting shareholders to veto unfavorable changes to their class rights. We take advantage of the presence of well-defined treatment and control groups and use the voting premium, a traditional measure of private benefits of control and shareholder expropriation, as the outcome variable. Based on a novel hand-collected dataset of dual-class stock companies in Russia and using a difference-in-difference regression analysis as well as an event study, we find a statistically and economically significant effect of improved protection of preferred shareholders on the value of their shares. The result is robust to several changes in the empirical specification. (JEL G30, G38, K22) The Author 2012. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Voting Premium and Corporate Governance: The Case of France

The objective of this paper is to analyze the voting premium and its interaction with the specific corporate governance structures in France. Besides determining the level of voting premium in France through a stock-market and a public transaction based analysis, the paper also analyzes the evolution of French corporate governance through the voting premium and the interaction between shareholder structures and corporate governance. In particular, we can observe that the peculiar cross-ownership structure developed between French companies in the 1990s explains interesting specificities of the French corporate governance structure.This is an update of a study done in 2004.

Am I Right or Am I Right? Dividend Privileges and the Value of Voting Rights

Abstract The value of a right should not be lower than zero. The present paper overcomes some possible measurement errors and proposes a new measure of the voting right, the Relative Vote Segment, which incorporates dividend privileges into the inferior class of shares, when granted. Results from Italian non-voting shares listed in the 1999-2008 period show that our more accurate measure reports an average voting right equal to +45.58%, while the standard relative price difference and the Nenova (2003) measure greatly underestimate its value and report average values equal to +20.35% and +1.30%, respectively. Our methodology reports almost no negative values, while traditional measures report almost 25% of negative values. Though a more correct measure of the voting right is essential to estimate its average value and make unbiased cross-country comparisons, the determinants of the voting rights are also well captured by the relative price difference, once the dividend yield differences are controlled for.Keywords: non-voting shares; voting premium; dual-class share firms; Italy JEL Classifications: G34

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.

The determinants of the voting premium in Italy: The evidence from 1974 to 2003

We examine the voting premium in Italy in the period 1974 to 2003, when it ranged from 1% to 100%. At firm level, the measure of the price differential between voting and non-voting stocks cannot be fully explained without taking into account the effect of the largest shareholder’s identity. Family-controlled firms have higher voting premiums, especially when the family owns a large stake in the company’s voting equity and the founder is the firm’s CEO and/or Chairman. We explain this result by showing that families attach greater importance to control and are more prone than other types of controlling shareholders to expropriate the non-voting class of shareholders.

The Determinants of the Voting Premium in Italy: The Evidence from 1974 to 2003

We examine the voting premium in Italy in the period 1974 to 2003, when it ranged from 1% to 100%. At firm level, the measure of the price differential between voting and non-voting stocks cannot be fully explained without taking into account the effect of the largest shareholder's identity. Family-controlled firms have higher voting premiums, especially when the family owns a large stake in the company's voting equity. We explain this result by showing that families attach greater importance to control and are more prone than other types of controlling shareholders to expropriate the non-voting class of shareholders.

Price differences between equity classes. Corporate control, foreign ownership or liquidity?

This paper is the first comprehensive study of price differences for dual class equity at the Oslo Stock Exchange. It analyzes the relative importance of corporate control, foreign ownership restrictions and stock market liquidity for the price differences. The Norwegian market has the peculiar feature that in part of the sample period non-voting shares were trading at a premium to voting shares, i.e., what is usually termed the “voting premium” was negative. This result can be rationalized by restrictions on foreign ownership. In the later part of the period, with no regulatory restrictions on foreign ownership, the voting premium is positive, and related to corporate governance and liquidity.

Price Differences between Equity Classes: Corporate Control, Foreign Ownership or Liquidity?

This paper is the first comprehensive study of price differences for dual class equity at the Oslo Stock Exchange. It analyzes the relative importance of corporate control, foreign ownership restrictions and stock market liquidity for the price differences. The Norwegian market has the peculiar feature that in part of the sample period nonvoting shares were trading at a to shares, i.e., what is usually termed the voting premium was negative. This result can be rationalized by restrictions on foreign ownership. In the later part of the period, with no regulatory restrictions on foreign ownership, the is positive, and related to corporate governance and liquidity.

Block Trading, Ownership Structure, and the Value of Corporate Votes

This paper shows that open market block trading can explain how private benefits of control enjoyed by large shareholders are reflected in the premium, i.e. the price difference between voting and non-voting shares. I first demonstrate in a microstructure model with informed traders and short-selling constraint that the trading activity of blockholders translates into a spread between the prices of voting and non-voting shares. In contrast to the extant theory, this model can explain the voting premium in the absence of corporate takeovers. In the empirical part of the paper, I show for a comprehensive sample of German dual class companies that large trades occur more often in voting shares than in non-voting shares, and that the block trading activity in voting shares is strongly correlated with the voting premium. Moreover, the effect of the ownership structure on the voting premium becomes insignificant once I control for the block trading activity in voting shares.

Non-Voting Shares and the Value of Control: The Impact of Corporate Regulation in Italy

Researchers have recently devoted their attention to the relationship between corporate and securities laws and the development of stock markets, claiming that high quality regulation, by reducing private benefits of control, stimulates broader and deeper capital markets. This paper tries to assess the impact of changes in Italian corporate law on private benefits during the twelve-year period 1989-2000. In this period, the Italian legislator introduced the mandatory bid rule (law 149/1992) and moved towards a higher protection of minority shareholders (through the legislative decree 58/1998). The paper focuses on these regulatory changes by analysing the evolution of the so-called voting premium, i.e. the price differential between voting and non-voting stocks, which might be regarded as a good proxy of private benefits of control. The analysis involves 80 publicly traded firms and supports the hypothesis that, along with the company's ownership structure, the liquidity and the fiscal treatment of non voting stocks as well as market factors (such as interest rates and traded volumes), the institutional framework matters. In particular, the estimation results show that the voting premium increased by about 2 percentage points after the introduction of the mandatory bid rule in 1992 and drop by about 7 percentage points following the enactment of the new corporate governance rules in 1998. The behaviour of voting and non-voting share prices during the period is thus consistent with the hypothesis that the expropriation of minority shareholders decreased after 1998.