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Do Excess Control Rights Benefit Creditors? Evidence from Dual-Class Firms

Published online by Cambridge University Press:  12 February 2020

Ting Xu Open the ORCID record for Ting Xu [Opens in a new window]
Ting Xu*
Affiliation:
Xu, xut@darden.virginia.edu, University of Virginia Darden School of Business
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Abstract

Excess control rights by inside shareholders have been documented to hurt minority shareholders. This paper shows that such governance feature may benefit creditors. Using a sample of U.S. dual-class firms, I show that these firms take less operational and financial risk than similar single-class firms, consistent with insiders’ emphasis on long-term survival to access ongoing private control benefits. Such risk avoidance translates into lower borrowing costs for dual-class firms. Further, lenders are able to use specific covenants to prevent potential expropriations by insiders. The overall relationship between excess control rights and firm value may be less negative than previously thought.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 3 , May 2021 , pp. 821 - 852
Copyright
© The Author(s). Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington 2020

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Footnotes

*

I am thankful to Jan Bena, Murray Carlson, Thomas Chemmanur, Ron Giammarino, Daniel Greene, Kai Li, Paul Malatesta (the editor), Yifei Mao, Ron Masulis (the referee), Hernán Ortiz-Molina, Carolin Pflueger, Pavle Radicevic, Kairong Xiao, Shuo Yang, and conference and seminar participants at the 2014 Financial Intermediation Research Society Conference, the 2014 Financial Management Association Asia/Pacific Conference, the 2013 Northern Finance Association Annual Meetings, and the University of British Columbia for helpful comments and discussions. I thank Andrew Metrick for sharing the dual-class firms data set. All errors are my own.

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