Corporate Governance and Firm Value at Dual Class

Firms

Ting Li and Nataliya Zaiats∗

This Version: December 2014

∗Li is from Department of Management & Business, Skidmore College, Saratoga Springs, NY 12866,tli@skidmore.edu, (518)580-5239. Zaiats is from School of Management, Simmons College, Boston, MA02115, nataliya.zaiats@simmons.edu, (617)521-2397. We are grateful for the insightful suggestions and com-ments from Lilian Ng, Hung-Chia Hsu, Yong-Cheol Kim, Richard Marcus, Valeriy Sibilkov, and James G.Tompkins, as well as participants of 2011 Annual Meeting of Southern Finance Association in Key West.All remaining errors are our responsibility.

Corporate Governance and Firm Value at Dual Class Firms

Abstract

This study explores whether corporate governance at dual class firms differs from that of their

single class counterparts and whether firm value at dual class firms is associated with governance.

Employing a sample of 1,452 U.S. dual class firm-year observations for the period 1996-2006, we

show evidence that dual class firms are more likely to employ more shareholder rights provisions

while exhibit lower board and board committee independence than single class firms. Results show

that firm value at dual class firms increases in shareholder rights and in board-related provisions,

particularly in director independence. While strong board-related governance at dual class firms

is significantly positively related to firm value in a multivariate setting, shareholder rights are

significantly associated with firm value only in instances of the weakest board provisions. Following

unification, firms employ more antitakeover provisions while strengthen their board and board

committee independence.

Keywords: Dual class firms; Corporate governance; Firm value; Unification

JEL Classification Number: G32; G34

1. INTRODUCTION

Dual class ownership structure represents the strongest antitakeover provision, and thus firms

with dual class status are practically immune to a hostile takeover. Gompers, Ishii, and Metrick

(2009) (GIM (2009) thereafter) report that about 6 percent of public companies in the U.S. during

1995-2002 have more than one class of common stock. Notably, a number of prominent firms

such as Google, Facebook, Nike, and Polo Ralph Lauren employ dual class ownership structure

to retain their voting power. Since the NYSE abandoned the requirement of listing with only

one share class in 1986, firms with dual class ownership structure have gathered strong attention

in empirical research in finance and economics. Specifically, prior literature focuses on agency

problems, abnormal returns, and firm values. Herein, we investigate whether corporate governance

at dual class firms differs from that at single class firms and whether governance at dual-class firms

is related to firm value.

The divergence between voting and cash flow rights at dual class firms exacerbates the agency

conflicts between managers and the outside investors. Firm managers are therefore more prone

to pursue private control benefits at shareholders’ expense. In line with the above argument,

extant studies underscore the agency problems associated with dual class ownership structure. For

instance, GIM (2009) show that firm value is positively associated with insiders’ cash flow rights

while negatively associated with insiders’ voting rights. Masulis et al. (2009) document that large

excess control rights at dual class firms lead to both greater private benefits of control and reduced

market value to the outside shareholders. Li et al. (2008) demonstrate that the level of institutional

ownership is substantially lower at dual class firms than at single class firms, and that the lack of

shareholder voting rights at dual class firms is a key detrimental factor in the portfolio decisions of

institutional investors.

To the best of our knowledge, no study to date has focused on corporate governance at dual

class firms. Since dual class status is the strongest antitakeover provision, it is important to

assess whether and how dual class firms employ the various alternative antitakeover mechanisms,

as well as whether their board-related governance provisions differ from those at their single class

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counterparts. Further, it is of particular interest to document whether governance differences

between single and dual class firms and among the dual class firms help explain value implications

at dual class firms. Although dual class ownership structure allows insiders to retain strong voting

power, the shareholder rights provisions, if available, may protect the outside investors against

the strongest antitakeover feature, represented by dual class status. It is also plausible that dual

class firms with stronger governance exhibit higher firm values than their counterparts with weaker

governance, even controlling for voting and cash flow rights divergence. Therefore, in this study,

we answer the following two questions. (1) Does corporate governance at dual class firms differ

from that at their single class counterparts? (2) Are governance provisions at dual class firms

significantly associated with firm value?

We employ a comprehensive U.S. dual class firm database to examine corporate governance at

these firms during 1996-2006. We draw on prior literature to identify five key antitakeover provisions

and seven board-related provisions that have previously been shown to affect shareholder rights or

firm value. We examine these provisions individually as well as construct additive indices to capture

all shareholder rights provisions or board-related provisions - shareholder rights index (SRI) and

board-related index (BRI). Focusing on a sample of 1,452 dual class firm-year observations, our

results show that dual class firms employ fewer antitakeover provisions (exhibit stronger shareholder

rights), more of several key board-related provisions associated with stronger governance, while

exhibit weaker board and board committee independence than single class firms. Specifically, a

larger proportion of dual class firms than of single class firms allow shareholders to call special

meeting, act by written consent, have no poison pill, no staggered board, and offer shareholders

cumulative voting rights. A larger proportion of dual class firms than of single class firms exhibit a

higher board meeting attendance ratio, optimal board size (board size between 5 and 16 members),

have CEO serving on 2 or fewer outside boards, and have separate chairman and CEO positions.

More dual class firms, however, exhibit lower compensation committee, nomination committee,

and director independence. Firms with the above features are more likely (or less likely, as above,

respectively) to be dual class firms and the proportion of firms with the above provisions increases

(or decreases, as above, respectively) with divergence between voting and cash flow rights at dual

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class firms.

We further examine whether and how corporate governance adopted by dual class firms relates

to firm value. We measure firm value as the industry-adjusted natural log of Tobin’s Q. We

construct portfolios based on wedge (voting rights minus cash flow rights) and shareholder rights

index (SRI) or board-related index (BRI), respectively. The results show that firm value increases

in each wedge portfolio with an improvement in shareholder rights or in board-related governance.

The multivariate tests show that both the shareholder rights index and the board-related index are

positively significantly related to firm value. However, none of the individual shareholder rights

provisions exhibits a significant relationship with firm value. Among board-related provisions,

director independence exhibits a positive significant link with value. Further tests suggest that the

strongest shareholder rights provisions relate positively to value only in instances of the weakest

board-related governance.

We also study corporate governance changes at dual class firms which unify their shares into

single class. Following unification, the proportion of firms allowing shareholders to call special

meetings, act by written consent, those without a poison pill or staggered board in place, or those

that offer shareholders cumulative voting rights, declines. Such a change implies a fall in shareholder

rights for firms that can no longer enjoy the increased private control benefits associated with the

dual class status. In turn, the proportion of firms with stronger director independence as well

as stronger nominating and compensation committee independence increases following unification.

We also find that dual class firms without a poison pill in place and those that allow shareholders

to act by written consent are less likely while those with stronger director independence are more

likely to unify.

Our study advances the existing literature in two ways. First, we expand the growing body of

work that examines the agency concerns at dual class firms. Superior voting rights may be sufficient

to provide incumbents at dual class firms with a powerful entrenchment mechanism. While extant

studies focus on divergence between voting and cash flow rights to assess how insiders exploit private

control benefits at outside investors’ expense, we examine whether and how corporate governance

varies among dual class firms as well as between dual class firms and their single class counterparts.

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We document that dual class firms employ fewer alternative antitakeover mechanisms and exhibit

weaker board and board committee independence than do single class firms. We also show that

shareholder rights at dual class firms improve, while board-related governance worsens in divergence

between voting and cash flow rights.

Second, our study presents direct evidence on the link between corporate governance and firm

value at dual class firms. Prior studies argue that the dual class structure is related to agency

problems and low firm values (e.g., GIM, 2009; Masulis et al., 2009). This study fills a gap

in the literature by demonstrating that governance differences at dual class firms exhibit value

implications, even after controlling for divergence between voting and cash flow rights. Specifically,

in presence of dual class ownership structure, which represents the strongest antitakeover device,

the alternative antitakeover provisions broadly do not relate significantly to firm value. Specifically,

only the strongest shareholder rights provisions index is positively significantly related to firm value

and only in instances of the poorest board governance. Importantly, however, dual class firms with

strong board-related governance provisions exhibit higher firm values. These results thus show

that dual class structure is not value destructive for all firms - dual class firm values increase in

governance, especially in stronger board-related provisions pertinent to board and board committee

independence.

The remainder of this paper is organized as follows. Section 2 presents our motivation and

hypotheses development. Section 3 describes the sample and variables employed in the empirical

tests as well as summarizes their statistics. Section 4 presents the empirical results, and the final

section concludes.

2. MOTIVATION AND HYPOTHESES DEVELOPMENT

2.1. Controversies at Dual Class Firms and Corporate Governance

Numerous studies have examined the advantages and drawbacks of dual class firms. Consistent with

the approach that multiple share classes may be beneficial, a body of work documents that dual

class ownership structure offers an efficient arrangement. DeAngelo and DeAngelo (1985) suggest

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that dual class firms may be viewed as an intermediate organizational form between a corporation

with dispersed ownership and a closely-held firm, and that this form is more likely when managerial

voting ownership yields benefits. Grossman and Hart (1988) contend that although one share-one

vote arrangement maximizes the importance of benefits to securityholders, it does not always do

so in a corporate control contest. In a similar fashion, Amoako-Adu and Smith (2001) illustrate

that dual class capitalization is employed as a monitoring mechanism to prevent an undesired

takeover. Further, comparing dual and single class IPOs, Smart and Zutter (2003) and Smart et al.

(2008) show that dual class firms reduce the dilution effect, mitigate underinvestment problem, and

experience less underpricing than their single class counterparts. Prior literature also demonstrates

that dual class ownership structure allows mitigating the agency concerns. For example, Moyer et

al. (1992) argue that the diminished role of market for corporate control in dual class firms could

be offset by enhancements in alternative agency control mechanisms, such as board composition

and capital structure policy. Further, Taylor and Whittred (1998) identify a variety of contractual,

institutional, and personal mechanisms which help ensure that gains are shared equally by both

stockholder classes in case control changes occur.

An increasing body of literature, however, argues that dual class ownership structure may be

suboptimal. For example, Cronqvist and Nilsson (2003) contend that the controlling minority

shareholders internalize only a small fraction of negative consequences of dual class ownership,

while enjoy all of the private benefits, thus causing private benefits extraction. Focusing on a

sample of dual class firms listed on 30 largest national capital markets, Nenova (2003) confirms

that parties in control of a corporation extract private control benefits to the exclusion of dispersed

shareholders. Li et al. (2008) document that voting rights are critical to institutional investor

decisions and that institutional ownership is significantly lower at dual class than at single class

firms. Dual class status thus appears to compromise firms’ access to equity capital by discouraging

institutional investment. Extant studies also particularly focus on the agency concerns that arise in

firms with dual class ownership structure. For instance, Holmen and Nivorozhkin (2007) examine

Swiss dual class firms and conclude that dual class ownership reduces the likelihood of acceptance

of value enhancing takeovers by the controlling family. Masulis et al. (2009) show that as the

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divergence between insider voting and cash flow rights widens, corporate cash holdings are worth

less to the outside shareholders, CEOs receive higher compensation, managers make shareholder

value-destroying acquisitions more often, and capital expenditures contribute less to shareholder

value.

To the best of our knowledge, no study to date has directly examined corporate governance at

dual class firms. We thus derive our conjectures pertinent to governance at dual versus at single

class firms by referring to evidence from the above private control benefits and agency-related

dual class literature. First, we are interested to ascertain whether and how dual class firms employ

alternative antitakeover mechanisms. As dual class ownership structure is the strongest antitakeover

device (GIM, 2009), it is plausible that dual class firms do not exhibit the necessity to employ the

alternative antitakeover devices to protect themselves from the market for corporate control to

the degree that single class firms do. By the same token, dual class firms may exhibit stronger

shareholder rights, as demonstrated by fewer alternative antitakeover mechanisms employed.

Second, we aim to compare board-related governance at dual class firms to that at their single

class counterparts as numerous studies have illustrated that board provisions relate significantly

to shareholder rights or firm value.1 We contend that based on the mounting evidence of the

various agency concerns associated with dual class ownership structure, dual class firms may ex-

hibit weaker board-related governance than their single class counterparts. Consistent with this

argument, DeAngelo and DeAngelo (1985) state that superior voting rights at dual class firms

provide managers with greater influence over the composition of the board of directors and thus,

with stronger impact pertinent to the firms’ general policies. The arguments above lead to our first

hypothesis:

H1: Corporate governance at dual class firms differs significantly from that at single class firms.Dual class firms exhibit stronger shareholder rights while weaker board-related governancethan single class firms.

1See, for example, Yermack (1996), Eisenberg et al. (1998), Bebchuk and Cohen (2005), Boone et al. (2007),Coles et al. (2008), among others.

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2.2. Firm Value at Dual Class Firms and Corporate Governance

We are further interested to ascertain whether governance differences at dual class firms bear any

firm value implications. It is plausible that corporate governance exhibits no incremental role in

valuation once the divergence between voting and cash flow rights is conditioned upon.

Numerous studies report the effects of dual class ownership structure on firm value. One

strand of literature suggests that dual class firms exhibit positive value implications. For instance,

Harris and Raviv (1988) argue that separating cash flow and voting rights at dual class firms

can maximize firm value at social optimality and that the equity value increases once the firm

announces a change from single to dual class ownership structure. In a similar fashion, Cornett

and Vetsuypens (1989) and Dimitrov and Jain (2006) document that dual class recapitalization

is associated with an increase in abnormal stock prices and enhanced shareholder value. On the

contrary, an increasing strand of studies suggests that dual class ownership structure is associated

with negative valuation effects. Specifically, Jarrell and Poulsen (1988) report significantly negative

returns at the announcement of dual class recapitalization. Focusing on the sample of firms from

eight East Asian economies, Claessens et al. (2002) provide evidence that firm value increases

with cash flow rights of the largest shareholder but decreases in instances of divergence between

voting and cash flow rights. Examining eighteen emerging markets, Lins (2003) reports that firm

value is lower when management’s control rights exceed cash flow rights. GIM (2009) examine a

comprehensive sample of the U.S. dual class firms and find that firm value increases in insiders’

cash flow rights while decreases in insiders’ voting rights.

A vast literature also documents the association between corporate governance and firm value.

For instance, GIM (2003) and Bebchuk et al. (2003) show a positive significant relationship between

governance and firm performance, measured by abnormal stock returns or Tobin’s Q. Further,

Chhaochharia and Laeven (2009) examine corporate governance across 30 countries and illustrate

that firms adopt the various favorable governance provisions beyond those minimally required for all

firms in a country, and that such governance improvements exhibit a positive significant relationship

with firm value.

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Among corporate governance provisions, extant studies address the valuation effects of anti-

takeover and of board-related provisions. A large body of work documents negative valuation

effects of antitakeover provisions, while some studies report positive value implications.2 GIM

(2003) show that firms with stronger shareholder rights exhibit higher firm value, profits, and sales

growth. Core et al. (2006) find that weak shareholder rights are associated with significant oper-

ating underperformance, while not with poor stock returns. Bebchuk et al. (2009) argue that an

increase in entrenchment index is associated with a significant reduction in firm value and large

negative stock returns. However, reexamining the relationship between firm value and a number

of antitakeover provisions, Straska and Waller (2010) document that value enhances at firms with

low bargaining power which adopt more antitakeover provisions. In this study, we are interested

to assess whether antitakeover provisions at dual class firms exhibit any valuation effects. Based

on the findings from the studies above, we anticipate that stronger shareholder rights at dual

class firms relate positively to firm value. Alternatively, since dual class status is the strongest

antitakeover device, the incremental role of the alternative antitakeover mechanisms in firm value

could be neutralized.

An increasing number of studies also document valuation effects of various board-related gov-

ernance features. For instance, Yermack (1996) reports an inverse relationship between board size

and firm value, and Eisenberg et al. (1998) find a negative significant association between board size

and profitability in a sample of small and midsize Finnish Firms. More recently, Coles et al. (2008)

document a U-shaped relationship between board size and Tobin’s Q. Further, a large strand of

literature consistently reports that stock returns are superior when outside directors hold a signif-

icant percentage of board seats (e.g., Baysinger and Butler, 1985; Brickley and James, 1987; Byrd

and Hickman, 1992; Lee, Rosenstein, Rangan, and Davidson, 1992; and Rosenstein and Wyatt,

1990). We thus postulate that stronger board-related governance at dual class firms may exhibit

positive valuation effects. The implications above give rise to our second hypothesis:

2See, for example, DeAngelo and Rice (1983), Linn and McConnell (1983), Malatesta and Walkling (1988), Lins(2003), among others.

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H2: Corporate governance at dual class firms is positively related to firm value.The value implications of board-related provisions are stronger than those of shareholderrights provisions.

3. DATA AND SAMPLE DESCRIPTION

Our sample comprises the following data sources: a) dual class firms’ information from GIM (2009)

and Nguyen and Xu (2010); b) corporate governance variables from Investor Responsibility Research

Center (IRRC); c) stock returns and financial variables from CRSP and Compustat. In this section,

we briefly describe the construction of our sample and provide some basic statistics pertinent to

our key variables.

Building a candidate sample based on data available from Securities Data Company (SDC),

S&P’s Compustat, CRSP, and IRRC, GIM (2009) construct an exhaustive list of U.S. dual class

firms by verifying their status with the SEC filings for the period 1994-2002. Insider holdings for

all dual class firms for both stock classes are first coded, and voting and cash flow rights are then

computed.3 Nguyen and Xu (2010) follow the sample selection criteria of GIM (2009) and extend

the data to 2006. We are deeply grateful to all the authors for providing the information pertinent

to the following variables: a) dual class status; b) voting rights, and c) cash flows rights for the

combined sample between 1994 and 2006.

We obtain corporate governance data from IRRC. Our study focuses on 5 anti-takeover and 7

board-related provisions that may potentially affect shareholder rights or firm value. Drawn from

prior literature, as explained in Section 2 above, we focus on the following anti-takeover provisions:

1) shareholders may call special meetings; 2) shareholders may act by written consent; 3) company

has no poison pill; 4) company has no staggered board; and 5) shareholders have cumulative

voting rights. We employ the following board-related provisions: 1) all directors attended 75%

of board meetings; 2) CEO serves on two or fewer boards of other firms; 3) the outside directors

comprise more than 50% of all directors; 4) nominating committee is composed solely of independent

outsiders; 5) compensation committee is composed solely of independent outsiders; 6) board size is

3Please see GIM (2009) for a detailed description of the sample selection procedure.

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greater than 5 but less than 16 directors; and 7) chairman and CEO positions are separate. While

IRRC’s directors data is published annually, Corporate Takeover Defenses provides information

for years 1995, 1998, 2000, 2002, 2004 and 2006. As anti-takeover metrics appear to be relatively

stable overtime, we set the missing values equal to prior year’s value. We designate 12 dummy

variables that each take the value of 1 if a firm satisfies an anti-takeover or a board-related provision

from the list above, and 0 if otherwise.

In addition to examining individual corporate governance metrics, we also focus on the additive

indices pertinent to anti-takeover and to board-related provisions. Specifically, we construct 2

indices for each firm: shareholder rights index (SRI) and board-related index (BRI). If dummy

indicators for all 5 (7) anti-takeover (board-related) provisions take the value of 1, the value of SRI

(BSI) index is 100%. Following Aggarwal et al. (2009), we express the corporate governance indices

as a proportion of non-missing provisions for each firm.4 Each of the anti-takeover/shareholder

rights and of the board-related provisions is associated with stronger governance. Thus, higher SRI

or BRI implies that a firm employs fewer anti-takeover provisions (exhibits stronger shareholder

rights), or enjoys more effective board governance, respectively.

Our initial sample comprises 1,452 dual class firm-year observations and 19,802 single class

firm-year observations. We further require that governance variables from IRRC, as well as firm-

level information from CRSP and Compustat be available to compute the control variables. We

also exclude firms from utilities and financial industries. As the directors data from IRRC becomes

available in 1996, we focus on the sample period between 1996 and 2006. Our final sample thus

comprises 1,309 dual class and 3,342 single class firm-year observations. To prevent the potential

effect of outliers on our results, we winsorize the variables at the top and bottom 1% of their

respective distributions.

Table 1 presents the distribution of corporate governance indices and of individual governance

provisions for dual-class and and single-class firms separately. We report means and medians

(in brackets below the mean values) for the indices and proportions of firms for the individual

4It is noteworthy that some studies (e.g., GIM, 2003; Bebchuk et al., 2008) compute additive indices as a proportionof all rather than of non-missing provisions. In unreported tests, we also construct indices in this manner and obtainqualitatively similar results.

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provisions. Following GIM (2009), we also construct the separation sample, which comprises firms

with voting rights greater than 50%, while with cash flow rights lower than 50%. The table also

reports the differences between dual and single class firms, and between dual class firms in the

separation sample and single class firms.

Panel A provides the results for the pooled sample, while Panel B focuses on the matched sample.

We match each dual-class firm with a single-class counterpart with the closest propensity score. We

obtain propensity scores by estimating a Probit model with GIM (2009) dual-class determinants,

which include 1) Fama-French industry classification; 2) a dummy variable that takes the value of

1 if a firm is a media company in its IPO year; 3) a dummy variable that takes the value of 1 if a

firm is named after a founder; 4) a dummy variable that takes the value of 1 if a firm is in a state

with anti-takeover laws; 5) percentile ranking of the IPO-year sales; 6) a firm’s profit relative to

other firms with the same IPO year; 7) percentage of all Compustat firms located in the same area

in the year prior to IPO; 8) percentage of all Compustat sales by firms located in the same area in

the year prior to IPO.5

The results in both Panels A and B are consistent and reveal several interesting observations.

SRI of dual-class firms is higher, while BRI is lower than those of single-class firms. The differences

for the two indices between single class firms and the separation sample are even more pronounced.

All the differences in means and medians are significant at 1% level. Such univariate statistics

implies that dual class firms enjoy stronger shareholder rights while exhibit weaker board-related

governance. Since dual-class status is the strongest anti-takeover provision that helps to effectively

insulate the firms from the market for corporate control, it appears that dual class firms do not

employ alternative anti-takeover features to the extent that single class firms choose to. On the

contrary, dual class firms exhibit less effective board provisions.

The differences between dual and single class firms for the individual governance provisions in

anti-takeover category fully conform with the result pertinent to the SRI. Specifically, more dual

class than single class firms allow shareholders to call special meetings, act by written consent,

have no poison pill, no staggered board in place, and offer shareholders cumulative voting rights.

5Please refer to GIM (2009) for a detailed description of the dual class status determinants.

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Interestingly, however, among board-related provisions, dual class firms exhibit stronger governance

features in some instances, while weaker in others. Specifically, more dual class than single class

firms exhibit higher board meeting attendance ratios, optimal board size (i.e., between 5 and 16

directors), have CEOs who serve on 2 or fewer outside boards, and separate chairman and CEO

positions. In turn, dual class firms exhibit lower nominating committee, compensation committee,

and director independence than their single class counterparts. Unreported Chi-square tests indi-

cate that the differences of distributions of anti-takeover provisions and of board-related provisions

between dual class and single class firms are highly significant. In sum, while dual class firms enjoy

some of the key board-related provisions pertinent to effective governance to a larger extent than

do single class firms, their board and board committee independence is compromised compared to

that of firms with single class status.

Table 2 reports Pearson cross-correlation coefficients of the dual-class dummy and the individual

corporate governance provisions. We observe that the dual-class status is significantly positively

correlated with all the shareholder rights provisions, with the exception of cumulative voting rights.

Dual-class dummy exhibits a significantly negative correlation with board independence provisions,

while significantly positive correlation with the remainder of the board-related variables. The ma-

jority of the corporate governance provisions are significantly correlated with one another. Broadly,

the correlation coefficients between the variables in our sample are moderately low, suggesting no

evidence of multicollinearity.

4. RESEARCH DESIGN AND EMPIRICAL ANALYSIS

4.1. Likelihood of Dual-Class Ownership Structure

GIM (2009) argue that firm, industry, and market characteristics at the time of a firm’s IPO

determine whether dual-class status will be adopted, and identify several key determinants of dual

class status. The three authors further contend that the insiders are more likely to successfully

adopt a dual class ownership structure at IPO time if the aggregate reduction in share value is less

than the private benefits of control. In this sub-section, we aim to ascertain whether and how a

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firm’s corporate governance it related to the likelihood of a firm to adopt a dual class ownership

structure. Such a pursuit also allows distinguishing between governance features of dual versus

single class firms.

We estimate Probit regressions assessing the likelihood of a firm’s dual class ownership structure

by regressing Dual, a dummy variable that takes the value of 1 if a firm has a dual class status in a

given year and 0 if otherwise, on corporate governance indices SRI and BRI, as well as individual

anti-takeover and board-related provisions. Drawing on prior literature, we also control for GIM

(2009) dual class determinants, described in Section 3 above in propensity score matching procedure

employed in Table 1 Panel B, as well as for the following firm characteristics: ratio of R&D over

sales; advertisement expenditures indicator that takes the value of 1 if a firm’s advertisement

expenditures are greater than 0, and 0 if otherwise; market to book ratio; capital expenditures

over total assets; total assets; market capitalization; leverage; firm age; external financing; asset

intangibility; and sales growth rate.6 The detailed description of all these variables is presented in

the Appendix. Throughout the study, all multivariate regressions also include industry and year

fixed effects (as applicable), and all associated p-values are computed based on standard errors

adjusted for heteroscedasticity and firm-level clustering.

Results are presented in Table 3 and underscore the coefficients of the governance indices as well

as of individual governance provisions. To conserve space, coefficients of the control characteristics

are not tabulated. Models 1 and 2 display the results focusing on shareholder rights index (SRI) and

board-related index (BRI), respectively, while Model 3 incorporates both indices. Model 4 includes

individual governance provisions. As the various anti-takeover or board-related provisions may

capture similar quality of a firm’s shareholder rights environment or of board-related governance,

our regression model incorporates one proxy variable at a time.

Consistent with our expectations, the results in Models 1-3 highlight that firms with higher

shareholder rights index are more likely to be dual class firms, while firms with higher board-

related index are less likely to employ dual class ownership structure. The coefficients of SRI and

6See, for example, DeAngelo and DeAngelo (1985), Denis and Denis (1994), Claessens et al. (2002), Faccio andLang (2002), Cronqvist and Nilsson (2003), Holmen et al. (2007), Li et al. (2008), GIM (2009), Masulis et al. (2009),Schmid (2009), among others.

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of BRI are significant at 1% level across all three models. Our findings in Model 4 suggest that

firms employing each of the 5 shareholder rights provisions are more likely to be dual class firms.

In turn, among board-related provisions, those pertaining to nominating committee, compensation

committee, and board independence are associated with lower likelihood of dual class status. The

remainder of the board-related provisions (with the exception of optimal board size, which is

positive and marginally significant) is insignificantly related to the likelihood of dual class status.

Such results imply that dual class firms are more likely to employ fewer alternative takeover devices

and thus exhibit stronger shareholder rights than do single class firms. However, dual class firms

appear to exhibit weaker board and board committee independence.

4.2. Corporate Governance and Divergence Between Voting and Cash FlowRights at Dual Class Firms

The findings in the subsection above highlight that governance characteristics in dual class firms

differ significantly from those at single class firms. To shed further light on the results above, in

this subsection, we are interested to assess whether and how corporate governance at dual class

firms varies with divergence between voting and cash flow rights. As in GIM (2009), voting (cash

flow) rights are presented as the percentage of vote (cash flow) ownership by officers and directors

across stock classes. We construct Wedge as the difference between voting and cash flow rights,

with higher values implying a greater divergence between voting and cash flow rights, and thus, a

potentially higher insider expropriation.

Table 4 outlines means and medians of governance indices as well as proportions of dual class

firms with individual governance provisions across three wedge portfolios. Portfolio 1 comprises

the bottom one-third of dual class firms with the lowest wedge, while Portfolio 3 constitutes the

top one-third of dual class firms with the largest divergence between voting and cash flows rights.

The portfolios are constructed in the following fashion. For each year, all sample firms are ranked

by Wedge and then divided into three equal portfolios. For robustness, we have also constructed

portfolios based on the ratios, rather than differences, of voting to cash flow rights. Untabulated

results remain qualitatively comparable to those displayed in Table 4.

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The results reveal that shareholder rights index (SRI) increases monotonically with wedge

(i.e., from 0.709, to 0.787, and 0.866). Each of the individual anti-takeover provisions follows the

same pattern. Therefore, as divergence between voting and cash flow rights increases, firms tend

to employ fewer anti-takeover provisions. Interestingly, Portfolio 2 exhibits the highest board-

related index (i.e., 0.638), as the index increases from its lowest level for Portfolio 1 (i.e., 0.591),

while then decreases for Portfolio 3 albeit to a level slightly higher than that for Portfolio 1 (i.e.,

0.596). The results for individual board-related provisions show a similar trend as does BRI, while

the board-related governance appears to be weaker for Portfolio 3 than for Portfolio 1 across

a majority of the board-related provisions. Thus, the middle one-third of dual class firms with

the moderate wedge exhibits the most effective board governance, followed by the dual class firms

with the lowest divergence between voting and cash flow rights, and then by those with the highest

divergence. In sum, the results suggest that dual class firms may attempt to placate shareholders

with the potential positive implications of stronger shareholder rights to countervail the plausibly

detrimental effects of higher wedge, as firms with the highest wedge exhibit the strongest shareholder

rights. In contrast, firms with the highest divergence between voting and cash flow rights exhibit

the least effective board-related governance.

4.3. Corporate Governance and Firm Value at Dual-Class Firms

Prior literature suggests that firm value is related to voting rights and to cash flow ownership. For

instance, focusing on a sample of firms from the East Asian economies, Claessens et al. (2002)

show that firm value improves with the cash flow ownership of the largest shareholder, while that

it deteriorates in the instances of voting rights exceeding the cash flow rights. GIM (2009) examine

a comprehensive sample of the U.S. firms and conclude that firm value increases in cash flow

rights while decreases in voting rights. Also, extant literature demonstrates that strong corporate

governance is associated with high firm value (e.g., GIM 2003; Bebchuk et al., 2008). In this

subsection, we examine whether corporate governance at dual class firms exhibits an association

with firm value. We are also interested to ascertain whether the link between governance and value

at dual class firms persists when the divergence between voting and cash flow rights is accounted

15

for. We expect a positive relationship between governance and firm values at dual class firms that

is distinct and unaffected by the inclusion of wedge.

We follow Kaplan and Zingales (1997) to use Tobin’s Q as a proxy for firm value. We compute

the metric as the market value of assets divided by the book value of assets, where the market value

of assets is the book value of assets plus the market value of common stock less the book value of

common stock and deferred taxes. To reduce measurement errors, we further follow GIM (2009) to

employ industry-adjusted ln Q, computed as the difference of the natural log of a firm’s Tobin’s Q

and the natural log of industry’s Q.7

To assess the distributions of firm values across different wedge and governance profiles, we

partition all dual class firms by Wedge and by shareholder rights or by board-related index, re-

spectively. The portfolios are constructed in the following manner. Each year, all dual class firms

are ranked by Wedge and grouped into three equal portfolios. Portfolio 1 represents the bottom

one-third of dual class firms with the lowest wedge, while Portfolio 3 captures the top one-third

of dual class firms with the highest wedge. We also independently rank all dual class firms each

year by SRI and by BRI. We respectively assign dual class firms into three equal portfolios, where

Portfolio 1 captures the bottom one-third of dual class firms with the lowest shareholder rights

or board-related index, while Portfolio 3 includes the top one-third of dual class firms with the

highest SRI or BRI. We then create eighteen distinct portfolios - nine portfolios of dual class firms

based on Wedge and SRI, and nine portfolios - based on Wedge and BRI. Specifically, if a firm

falls into Portfolio 1 based on Wedge and into Portfolio 1 based on SRI (BRI), then it is as-

signed into Portfolio 11. Such a portfolio comprises all dual class firms with the lowest wedge and

the weakest shareholder rights (board-related governance). Respectively, Portfolio 33 includes all

dual class firms with the highest wedge and the strongest shareholder rights (board-related index).

Table 5 reports means and medians of firms values across nine wedge/shareholder rights index

portfolios and nine wedge/board-related index portfolios. P-values are reported to the right of

means and medians. The results demonstrate that firm values increase in shareholder rights in

7We also employed industry-adjusted Tobin’s Q (computed as the difference of a firm’s Tobin’s Q and the industry’sQ) and inverse industry-adjusted Q (computed as −( 1

Q− 1

industry−adjusted lnQ)) as firm value proxies. The results

are consistent.

16

every wedge portfolio. Specifically, industry-adjusted ln Q increases from 0.118 in Portfolio 11 to

0.395 in Portfolio 13. Likewise, firm values increase from 0.407 to 0.534 and from 0.135 to 0.185

in Portfolios 21 and 23 and Portfolios 31 and 33, respectively. Interestingly, firm values are the

highest across portfolios with Wedge = 2, while they are the lowest in portfolios with the highest

divergence between voting and cash flow rights (i.e., in those with Wedge = 3). Such evidence

indicates that accounting for divergence between voting and cash flow rights in dual class firms,

shareholder rights play a positive role in firm value, and that higher wedge is generally associated

with lower firm value.

The results display a similar pattern across portfolios which focus on wedge and board-related

provisions. Controlling for wedge, firm value generally increases in board-related provisions. Inter-

estingly, firm values are the highest across portfolios with Wedge = 2, and they are the lowest in

those with the highest wedge. These findings are aligned with our expectation that more effective

board governance is associated with higher firm values even if divergence between voting and cash

flow rights is accounted for. Combined, the findings in Table 5 imply that corporate governance

provisions play a distinct role for firm values of dual class firms and could potentially help mitigate

the negative valuation implications of divergence between voting and cash flow rights.

We next assess whether corporate governance indices as well as individual governance provisions

at dual class firms are associated with firm value in a multivariate setting. We conduct our analyses

by regressing industry-adjusted ln Q on governance indices and provisions and report the results

in Table 6. GIM (2009) argue that cash flow rights and voting rights affect insider incentives

differently, and that each type of ownership can exert an independent effect on valuation. We

thus control for cash flow and for voting rights in our regressions, as well as for squared terms

of these two variables, to adjust for nonlinearities. We also draw on prior literature to include

firm characteristics that have previously been shown to relate to firm value.8 We thus also include

the following variables: total assets; firm age; Delaware incorporation indicator; insider ownership;

return on assets; capital expenditures to total assets; leverage; and R&D to sales.

8See, for example, Denis and Denis (1994), Claessens et al. (2002), Cronqvist and Nilsson (2003), Lins (2003),GIM (2003), GIM (2009), Schmid (2009) among others.

17

Models 1 and 2 focus on shareholder rights index and board-related index, respectively, while

Model 3 comprises both indices. The results show that while board-related index, BRI, exhibits

a positive strongly significant association with firm value, the coefficient estimates of shareholder

rights index, SRI, are insignificant. In Model 4, consistently with Table 3, the individual anti-

takeover and board provisions are incorporated into regressions with one variable at a time. The

evidence in Model 4 corroborates that of the first three models. Specifically, none of the individual

shareholder rights provisions exhibits a significant association with firm value. In turn, among

board-related provisions, the coefficient of director independence is positive and significant, while

the remainder of the board provisions is insignificantly associated with firm value. In sum, the

evidence in Table 6 suggests that only board-related provisions, and director independence in

particular, exhibits a positive significant association with firm value, while the shareholder rights

provisions play no role in firm valuation. Such finding is perhaps not surprising as the implications

from evidence in other tables suggest that it is plausible that dual class firms, especially those

with stronger divergence between voting and cash flow rights, are more likely to exhibit stronger

shareholder rights by adopting fewer anti-takeover provisions. This evidence may not necessarily

imply an insider behavior consistent with shareholder interests. Instead, as dual class status is

the stronger anti-takeover device, the alternative anti-takeover mechanisms may not be marginally

important to protect the firm from the corporate control market. Dual class firms may placate

shareholders by adopting fewer anti-takeover provisions, while these stronger shareholder rights do

not seem to exhibit the link the firm value. In contrast, dual class firms with more effective board

governance appear to enjoy the positive valuation effects.

As findings in Table 6 above do not consistently point to a strong role of the majority of the

governance provisions in firm valuation, we next attempt to shed more light on these results by

exploiting the relationships of the extreme forms of governance at dual class firms with firm value.

We focus on selected portfolios constructed for tests in Table 5 above. Specifically, we designate

subsamples with the top one-third and the bottom one-third of firms by SRI, and by BRI. We

thus create the following indicator variables - High SRI, Low SRI, High BRI, and Low BRI that

each take the value of 1 if a dual class firm belongs to the respective portfolio in a given year, and

18

0 if otherwise. To verify whether the extreme forms of anti-takeover or of board-related provisions

exhibit any differential effects on firm valuation, we also construct the following interaction terms of

these dummy indicators - High SRI×High BRI, High SRI×Low BRI, Low SRI×High BRI,

and Low SRI × Low BRI.

Table 7 reports the results of OLS estimations across 4 models where industry-adjusted ln Q is

regressed on different combinations of the indicator variables and their interactions, defined above.

The control characteristics are the same as those in Table 6. The results underscore that high

(low) board-related index is positively (negatively) significantly associated with firm value, while

neither high nor low shareholder rights index bears a significant link with firm value. Interestingly,

however, the results in Model 2 highlight that high shareholder rights index is positively significantly

associated with firm value only in the instances of the low board-related index. Broadly, such

findings corroborate those in Table 6. They suggest that the role of anti-takeover provisions in firm

valuation is rather limited as only the strongest shareholder rights index is positively associated

with firm value and only if board-related governance is the weakest. Instead, the (in)effective board

governance at dual class firms bears positive (negative) value implications across all specifications.

Importantly, the role of board governance in dual class firm valuation persists as voting and cash

flow rights are accounted for. This result particularly underscores an incremental effect of board-

related provisions on firm value at dual class firms.

4.4. Corporate Governance Changes around Unification Events

Extant literature examines the reasons for consolidations of dual class shares into single class as well

as implications of unification. For instance, Amoako-Adu and Smith (2001) and Li et al. (2008)

report that unification is required in debt restructuring, helps facilitate subsequent equity issuance

and listings on the U.S. exchanges, and increases appeal by prospective investors, among others.

Although focusing on the sample of 80 Israeli firms, Lauterbach and Yafeh (2011) do not find

performance improvements following capitalization into single class, a growing strand of literature

reports positive abnormal returns associated with the announcement of dual class unification as

well as subsequent firm value increases and cost of equity financing reductions (e.g., Ehrhardt et

19

al., 2005; Pajuste, 2005; Dittmann and Ulbricht, 2007). In this subsection, we are interested to

investigate whether and how corporate governance changes around unification events. Drawing

from findings of the above literature, especially those pertinent to the positive valuation effects, we

predict that recapitalization into single class could be broadly beneficial for shareholders and could

be associated with improved governance.

We examine corporate governance changes around unification events by comparing the two

periods - before and after unification. Specifically, we designate year t as unification year; thus, t−3

(t−5) and t+3 (t+5) denote 3(5) years prior to and following unification, respectively.9 The results

are contained in Table 8 and highlight means and medians of anti-takeover index (SRI), board-

related index (BRI) as well as proportions of firms with individual shareholder rights and with

board-related provisions for the periods preceding and following unification events. We also report

difference tests from before- to after-unification periods. The evidence suggests that shareholder

rights index decreases, while board-related index increases significantly following unification. In

all instances, the differences are more pronounced in 5-year than in 3-year time periods. With the

exception of cumulative voting rights provision, where the proportion of firms with this provision

appears to increase following unification, the proportions of firms with each of the remainder of

shareholder rights provisions decrease after capitalization into single class. Among board-related

provisions, those pertinent to independence - nominating committee, compensation committee, and

director independence increase following unification, while the proportion of firms with high board

meeting attendance, those with CEOs serving on 2 or fewer boards, with optimal board size, and

separate chairman and CEO positions, decrease following unification. We interpret that as firms

capitalize into single class thus removing the strongest anti-takeover device of dual class status,

they employ more alternative anti-takeover mechanisms thereby decreasing shareholder rights. In

turn, unification appears to be associated with more effective board governance as measured by

stronger board independence metrics.

In light of the results in Table 8 above, we are further interested to ascertain which dual class

9In unreported tests, we also assess corporate governance changes examining periods 1-year prior to and followingunification, while do not observe any major governance changes in this shorter time frame. Such finding is perhapsnot surprising as governance variables generally change slowly overtime.

20

firm governance profiles exhibit a higher unification likelihood. We thus estimate a Probit model

by regressing Unification - a dummy indicator, which takes the value of 1 if a dual class firm

capitalizes into single class in a given year and 0 if otherwise, on individual governance provisions

separately. The control characteristics are drawn from prior literature that explores unification

determinants and include the following variables - insider ownership; market-to-book ratio; capital

expenditures to total assets; firm size; leverage; and sales growth rate.10 The detailed description

of these variables is presented in the Appendix. As the various anti-takeover or board-related

provisions may capture similar quality of a firm’s shareholder rights environment or of board-

related governance, consistently with Tables 3 and 6, our regression model incorporates one proxy

variable at a time. Table 9 yields several interesting results. Among anti-takeover provisions, firms

that are allowed to act by written consent and those without a poison pill in place are less likely to

unify. In turn, firms with higher director independence are more likely to unify. Based on earlier

interpretations that shareholder rights provisions could potentially be employed by dual class firms

to placate shareholders that adoption of these provisions signals insider behavior consistent with

shareholder interests, we observe that the presence of some of these shareholder rights provisions

is linked to lower likelihood of unification. However, board independence is apparently indicative

of more effective board governance and is thus linked to a higher unification likelihood.

5. CONCLUSION

This study aims to assess (i) whether and how corporate governance at dual-class firms differs from

that at single-class firms and (ii) whether governance at dual-class firms is related to firm value.

We exploit a sample of 1,452 U.S. dual-class firm-year observations during 1996-2006 and obtain

several interesting results that are consistent with our expectations.

We show that dual class firms undertake fewer anti-takeover provisions, more board-related

provisions pertinent to strong governance, while exhibit weaker board and board committee in-

dependence compared to single class firms. Specifically, a larger proportion of dual-class than of

10See, for example, Amoako-Adu and Smith (2001), Hauser and Lauterbach (2004),Pajuste (2005), Dittmann andUlbricht (2007), Li et al. (2008), among others.

21

single-class firms allow shareholders to call special meetings, act by written consent, have no poison

pill or staggered board in place, and offer shareholders cumulative voting rights. Further, more

dual-class than single-class firms exhibit a high board meeting attendance ratio, optimal board size,

separate chairman and CEO positions, and have CEOs serving on 2 or fewer boards. However, nom-

ination committee, compensation committee, and board independence are lower at dual-class than

at single-class firms. We further show that firms with all the above governance provisions are more

likely (or less likely, as above, respectively) to be dual-class firms and that proportion of dual-class

firms with such provisions increases (or decreases, as above, respectively) with divergence between

voting and cash flows rights (i.e., wedge).

Partitioning into portfolios by divergence between voting and cash flow rights and by governance

provisions, we find that dual class firms with stronger shareholder rights or board-related provisions

exhibit higher values in each wedge portfolio. Although both shareholder rights and board-related

provisions indices are significantly positively related to firm value in a multivariate setting, none of

the individual shareholder rights provisions exhibits a statistically significant link with firm value. In

turn, among board-related provisions, board independence is significantly positively associated with

firm value. Further tests show that the strongest shareholder rights provisions index is positively

significantly associated with firm value only in instances of the weakest board governance. Finally,

we find that following unification, a larger proportion of firms employ each of the antitakeover

provisions, while a smaller proportion of firms exhibit a high board meeting attendance ratio,

optimal board size, separate chairman and CEO positions, and have CEOs serving on 2 or fewer

boards. However, board and board committee independence increases after unification. We also

find that firms which allow shareholders to act by written consent or those with no poison pill in

place are less likely, while firms with higher director independence are more likely to unify. We

have thus offered evidence to suggest that dual class firms exhibit distinct governance profiles,

compared to those of their single class counterparts, and that stronger governance at dual class

firms relates positively to firm value. Such findings shed further light on the issue of dual class

ownership structure cost-benefit tradeoff and the role of governance in this trade-off. Our results

suggest that controlling for divergence between voting and cash flow rights, which has been shown

22

by prior literature to relate negatively to firm value, stronger governance may countervail the

detrimental value impacts of dual class ownership structure associated with the increased private

control benefits.

23

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26

Appendix A Variable Definitions

Variable DefinitionTakeover provisions (Data source: IRRC)Call special meeting Equals 1 if shareholders may call special meetings, and 0 if otherwiseAct by written consent Equals 1 if shareholders may act by written consent, and 0 if otherwiseNo poison pill Equals 1 if company has no poison pill, and 0 if otherwiseNo staggered board Equals 1 if company has no staggered board, and 0 if otherwiseCumulative voting rights Equals 1 if shareholders have cumulative voting rights, and 0 if otherwise

Board-related provisions (Data source: IRRC)All attend more than Equals 1 if all directors attended 75% of board meetings,75% of board meetings and 0 if otherwise

CEO serves on 2 or fewer Equals 1 if CEO serves on two or fewer boards of other firms,outside boards and 0 if otherwise

Outside directors>50% Equals 1 if the outside directors are more than 50%, and 0 if otherwise5<Board size<16 Equals 1 if board size is greater than 5 but less than 16,

and 0 if otherwiseNominating composed Equals 1 if nominating committee is composed solely of independentsolely of outsiders outsiders, and 0 if otherwise

Chairman and CEO are separated Equals 1 if chairman and CEO are separated, and 0 if otherwiseCompensation composed Equals 1 if compensation committee is composed solely of independentsolely of outsiders outsiders, and 0 if otherwise

Governance indices (Data source: IRRC)SRI Percentage of non-missing shareholder rights provisions that a firm satisfiesBRI Percentage of non-missing board-related provisions that a firm satisfies

GIM (2009) determinants (Data source: GIM (2009) and COMPUSTAT)IPOname Equals 1 if the firm’s name at IPO includes a person’s name,

and 0 if otherwiseMedia Equals 1 if the firm was a “media“ company in its IPO year,

and 0 if otherwiseStateLaw Equals 1 if the firm was incorporated in states with anti-takeover laws,

and 0 if otherwiseSalesRank Percentile ranking of the IPO year sales of the firm relative to other firms

with the same IPO yearProfitRank Percentile ranking of the IPO year profit of the firm relative to other firms

with the same IPO year%Firms Percentage of all Compustat firms located in the same metropolitan or

micropolitan statistical area (MSA) as firm i in the year before firm i’s IPO%Sales Percentage of all Compustat sales by firms located in the same micropolitan

statistical area (MSA) as firm i in the year before firm i’s IPOSales/RegionSales Ratio of a firm’s sales to the sales of all firms in the same region

27

Variable Definitions (Continued)Variable DefinitionFirm values (Data source: COMPUSTAT)Tobin’s Q The market value of assets divided by the book value of assets,

where the market value of assets is the book value of assets plus the marketvalue of common stock less the book value of common stock less balancesheet deferred taxes

Industry-adjusted ln Q Ln Tobin’s Q - Ln Industry Q

Other control variables (Data source: CRSP, COMPUSTAT, and GIM(2009))CFR Cash flow rights, computed as total percentage of cash flow ownership

by officers and directors across share classesCFR2 Squared cash flow rightsVR Voting rights: computed as the total percentage of votes owned by officers

and directors across share classesVR2 Squared voting rightsInsider ownership Fraction of shares owned by officers and directorsR&D/Sales The ratio of R&D expenditures to salesAd expenditures dummy Equals 1 if advertisement expenditures are greater than 0, and 0 if otherwiseM/B Market to book ratioCapex/Assets Capital expenditures to total assetsTotal Assets Log of the book value of total assetsMarket Capitalization Market price times number of outstanding sharesLeverage Total debt to market value of total assetsFirm age The number of years since a firm’s first appearance in CRSPExternal financing The difference between required investment and internally available capital

for investmentAsset intangibility (1-PPE+Inventories)/ Total AssetsSales growth rate Average annual sales growth over the past 3 yearsDelaware incorporation Equals 1 if the firm is incorporated in Delaware, and 0 if otherwiseROA Net income to book value of total assets

28

Table 1 Comparison of Corporate Governance between Dual and Single ClassFirms

This table presents univariate tests pertinent to corporate governance at dual versus single class firms. Specifically, wereport means and medians (in brackets below mean values) of corporate governance indices and proportions of firmswith individual governance provisions at dual and single class firms. Panel A focuses on the pooled sample of firms,while Panel B is based on the sample matched by propensity scores, obtained by estimating a Probit model withGIM (2009) dual class determinants. We also report difference tests between dual and single class firms and betweendual class firms in the ”separation sample” and single class firms. SRI is shareholder rights index computed as thepercentage of non-missing shareholder rights provisions that a firm satisfies. BRI is board-related index computed asthe percentage of satisfied board-related provisions to non-missing board-related provisions. All variables are definedin Appendix A. NObs is the number of firm-year observations. Statistical significance is reported based on p-valuesassociated with the t-test for the difference in mean values and with Wilcoxon test for the difference in medianvalues. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively. No statistical significanceis presented for individual governance provisions computed as proportions of firms with such provisions. The sampleperiod is from 1996 to 2006.

Panel A: Pooled Sample

Dual class Single class Separation Dual-Single Separation-Single

Corporate Governance Mean Mean Mean Mean Mean[Median] [Median] [Median] [Median] [Median]

SRI 0.79 0.59 0.87 0.20*** 0.28***[0.80] [0.60] [1.00] [0.20***] [0.40***]

BRI 0.61 0.70 0.61 -0.09*** -0.09***[0.60] [0.71] [0.60] [-0.11***] [-0.11***]

Shareholder rights provisionsCall special meeting 0.69 0.57 0.76 0.12 0.19

[1.00] [1.00] [1.00] [0.00] [0.00]Act by written consent 0.71 0.59 0.76 0.13 0.17

[1.00] [1.00] [1.00] [0.00] [0.00]No poison pill 0.76 0.39 0.85 0.37 0.46

[1.00] [0.00] [1.00] [1.00] [1.00]No staggered board 0.59 0.38 0.66 0.21 0.28

[1.00] [0.00] [1.00] [1.00] [1.00]Cumulative voting rights 0.84 0.83 0.83 0.01 0.00

[1.00] [1.00] [1.00] [0.00] [0.00]Board-related provisionsAll attend more than 75% of board meetings 0.58 0.53 0.65 0.06 0.12

[1.00] [1.00] [1.00] [0.00] [0.00]CEO serves on 2 or fewer outside boards 0.60 0.50 0.67 0.09 0.17

[1.00] [1.00] [1.00] [0.00] [0.00]Outside directors>50% 0.33 0.47 0.36 -0.14 -0.11

[0.00] [0.00] [0.00] [0.00] [0.00]Nominating composed solely of outsiders 0.10 0.23 0.13 -0.13 -0.10

[0.00] [0.00] [0.00] [0.00] [0.00]Compensation composed solely of outsiders 0.33 0.39 0.34 -0.06 -0.05

[0.00] [0.00] [0.00] [0.00] [0.00]5<board size<16 0.69 0.58 0.75 0.11 0.17

[1.00] [1.00] [1.00] [0.00] [0.00]Chairman and CEO are separated 0.19 0.14 0.19 0.05 0.05

[0.00] [0.00] [0.00] [0.00] [0.00]NObs 1354 14688 480

29

Panel B: Matched Sample

Dual class Single class Dual-Single

Corporate Governance Mean Mean Mean[Median] [Median] [Median]

SRI 0.81 0.63 0.18***[0.80] [0.60] [0.20***]

BRI 0.61 0.71 -0.10***[0.60] [0.71] [-0.11***]

Shareholder rights provisionsCall special meeting 0.80 0.66 0.13

[1.00] [1.00] [0.00]Act by written consent 0.80 0.66 0.15

[1.00] [1.00] [0.00]No poison pill 0.85 0.50 0.36

[1.00] [0.00] [1.00]No staggered board 0.67 0.44 0.22

[1.00] [0.00] [1.00]Cumulative voting rights 0.94 0.91 0.04

[1.00] [1.00] [0.00]Board-related provisionsAll attend more than 75% of board meeting 0.58 0.48 0.10

[1.00] [0.00] [1.00]CEO serves on 2 or fewer outside boards 0.59 0.50 0.09

[1.00] [0.00] [1.00]Outside directors>50% 0.30 0.41 -0.11

[0.00] [0.00] [0.00]Nominating composed solely of outsiders 0.10 0.23 -0.13

[0.00] [0.00] [0.00]Compensation composed solely of outsiders 0.32 0.38 -0.06

[0.00] [0.00] [0.00]5<board size<16 0.69 0.53 0.16

[1.00] [1.00] [0.00]Chairman and CEO are separated 0.17 0.15 0.02

[0.00] [0.00] [0.00]NObs 913 913

30

Tab

le2

Cro

ss-C

orr

ela

tion

Coeffi

cients

This

table

pre

sents

Pea

rson

cross

-corr

elati

on

coeffi

cien

tsof

dual

class

dum

my

indic

ato

rw

ith

the

indiv

idual

corp

ora

tegov

ernance

pro

vis

ions.

All

vari

able

sare

defi

ned

inA

pp

endix

A.

P-v

alu

esare

rep

ort

edin

pare

nth

eses

.

Special

Written

No

poison

No

staggere

dCumulative

Attend

Serv

es

Outd

irNomin

ating

Compensa

tion

Board

Chairman&

CEO

outd

iroutd

irsize

separa

ted

Dual

0.064

0.065

0.193

0.104

0.008

0.031

0.052

-0.075

-0.079

-0.034

0.065

0.038

(0.00)

(0.00)

(0.00)

(0.00)

(0.26)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

Call

specialmeeting

0.534

0.222

0.300

0.109

-0.133

-0.142

-0.157

-0.134

-0.142

-0.144

-0.010

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.13)

Actby

written

conse

nt

0.220

0.312

0.097

-0.104

-0.107

-0.130

-0.108

-0.105

-0.105

-0.015

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.03)

No

poison

pill

0.295

0.152

-0.079

-0.064

-0.170

-0.110

-0.109

-0.089

0.016

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.02)

No

staggere

dboard

0.098

-0.041

-0.034

-0.068

-0.032

-0.047

-0.070

-0.022

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

Cumulativevoting

rights

-0.069

-0.016

-0.042

0.028

-0.014

-0.056

-0.071

(0.00)

(0.01)

(0.00)

(0.00)

(0.04)

(0.00)

(0.00)

All

attend

more

than

75%

ofboard

meetings

0.646

0.566

0.359

0.511

0.722

0.269

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

CEO

serv

eson

2orfeweroutsid

eboard

s0.586

0.495

0.722

0.711

0.161

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

Outsid

edirecto

rs>50%

0.528

0.638

0.638

0.154

(0.00)

(0.00)

(0.00)

(0.00)

Nomin

ating

compose

dso

lely

ofoutsid

ers

0.598

0.398

0.067

(0.00)

(0.00)

(0.00)

Compensa

tion

compose

dso

lely

ofoutsid

ers

0.543

0.129

(0.00)

(0.00)

5<board

size<16

0.278

(0.00)

31

Table 3 Dual Class Status Probability and Corporate Governance

This table reports firm-level Probit regressions, where the dependent variable is a dual class dummy indicator and thekey independent variable is shareholder rights index (SRI), board-related index (BRI), or an individual governanceprovision. Control variables include GIM (2009) dual class determinants; R&D/sales; ad expenditures dummy; M/B;capex/assets; total assets; market capitalization; leverage; firm age; external financing; asset intangibility; and salesgrowth rate. All variables are defined in Appendix A. Model 1 focuses on shareholder rights index, SRI; Model 2 - onboard-related index, BRI; Model 3 incorporates both indices; Model 4 focuses on individual governance provisionswith inclusion of one variable at a time. All regressions include industry and year fixed effects, and all associatedp-values reported in parentheses are computed based on standard errors adjusted for heteroscedasticity and firm-levelclustering. NObs is the number of firm-year observations, and R̄2 is R-squared. ***, ** and * denote statisticalsignificance at 1, 5, and 10% levels, respectively. The sample period is from 1996 to 2006.

1 2 3 4SRI 2.039*** 2.069***

(0.000) (0.000)BRI -1.029*** -1.159***

(0.000) (0.000)Shareholder rights provisionsCall special meeting 0.594***

(0.000)Act by written consent 0.497***

(0.000)No poison pill 0.742***

(0.000)No staggered board 0.525***

(0.000)Cumulative voting rights 0.310*

(0.062)Board-related provisionsAll attend more than 75% of board meetings 0.077

(0.482)CEO serves on 2 or fewer outside boards -0.300

(0.137)Outside directors >50% -0.595***

(0.000)Nominating composed solely of outsiders -0.431***

(0.000)Compensation composed solely of outsiders -0.418***

(0.000)5<board size<16 0.320*

(0.074)Chairman and CEO are separated -0.038

(0.666)Control variables Yes Yes Yes Yes

Industry FE Yes Yes Yes Yes

Year FE Yes Yes Yes Yes

Intercept -12.046*** -8.547*** -11.065***(0.000) (0.000) (0.000)

NObs 4,651 4,651 4,651 4,651

R̄2 12.95% 10.55% 13.39%

32

Table 4 Corporate Governance at Dual Class Firms by Wedge Portfolio

This table presents means and medians (in brackets below mean values) of shareholder rights and of board-relatedindex and proportions of firms with individual governance provisions across three wedge portfolios at dual class firms.Wedge is computed as voting rights minus cash flow rights. Portfolio 1 (3) reports governance values for the bottom(top) one third of firms with the lowest (highest) wedge. NObs is the number of firm-year observations. The sampleperiod is from 1996 to 2006.

Wedge

Mean[Median]

1 2 3SRI 0.709 0.787 0.866

[0.800] [0.800] [1.000]BRI 0.591 0.638 0.596

[0.571] [0.667] [0.571]Shareholder rights provisionsCall special meeting 0.630 0.667 0.746

[1.000] [1.000] [1.000]Act by written consent 0.628 0.726 0.751

[1.000] [1.000] [1.000]No poison pill 0.704 0.700 0.841

[1.000] [1.000] [1.000]No staggered board 0.481 0.581 0.660

[0.000] [1.000] [1.000]Cumulative voting rights 0.824 0.811 0.865

[1.000] [1.000] [1.000]Board-related provisionsAll attend more than 75% of board meetings 0.630 0.719 0.687

[1.000] [1.000] [1.000]CEO serves on 2 or fewer outside boards 0.692 0.715 0.680

[1.000] [1.000] [1.000]Outside directors >50% 0.388 0.421 0.316

[0.000] [0.000] [0.000]Nominating composed solely of outsiders 0.102 0.158 0.106

[0.000] [0.000] [0.000]Compensation composed solely of outsiders 0.379 0.439 0.302

[0.000] [0.000] [0.000]5<board size<16 0.811 0.849 0.746

[1.000] [1.000] [1.000]Chairman and CEO are separated 0.198 0.285 0.185

[0.000] [0.000] [0.000]NObs 449 456 404

33

Table 5 Firm Value at Dual Class Firms by Wedge and by Governance Portfolio

This table presents means and medians (in brackets below mean values) of industry-adjusted ln Q across wedge andgovernance portfolios at dual class firms. Portfolio 1 (3) pertinent to wedge comprises the bottom (top) one third offirms with the lowest (highest) wedge. Portfolio 1 (3) pertinent to shareholder rights index, SRI, or board-relatedindex, BRI, includes the bottom (top) one third of firms with the lowest (highest) shareholder rights or board-relatedgovernance, respectively. As such, Portfolio 11 (33) presents firm values for the bottom (top) one third of firms withthe lowest (highest) wedge and the lowest (highest) SRI or BRI. P-values associated with the t-test for means andwith the Wilcoxon test for medians are presented to the right of mean and median values. NObs is the number offirm-year observations. The sample period is from 1996 to 2006.

Industry-adjusted LnQ Industry-adjusted LnQ

Wedge SRI Mean P-value NObs BRI Mean P-value NObs[Median] [Median]

1 0.118 (0.158) 182 1 0.024 (0.698) 109[-0.024] (0.320) [0.000] (0.641)

1 2 -0.074 (0.039) 89 2 0.397 (0.001) 110[-0.106] (0.016) [-0.007] (0.206)

3 0.395 (0.000) 98 3 0.223 (0.022) 120[0.015] (0.012) [0.016] (0.134)

1 0.407 (0.000) 112 1 0.408 (0.000) 89[0.199] (0.001) [0.195] (0.000)

2 2 0.482 (0.001) 111 2 0.516 (0.000) 123[0.111] (0.008) [0.294] (0.000)

3 0.534 (0.000) 147 3 0.635 (0.000) 147[0.337] (0.000) [0.241] (0.000)

1 0.135 (0.245) 66 1 -0.020 (0.796) 98[-0.016] (0.721) [-0.087] (0.067)

3 2 0.267 (0.002) 106 2 0.245 (0.003) 136[0.071] (0.037) [0.070] (0.022)

3 0.185 (0.012) 204 3 0.090 (0.325) 93[0.000] (0.424) [0.000] (0.743)

34

Table 6 Relationship Between Firm Value and Corporate Governance at DualClass Firms

This table reports firm-level OLS regressions, where the dependent variable is industry-adjusted ln Q and the keyindependent variable is shareholder rights index (SRI), board-related index (BRI), or an individual governance pro-vision. Control variables include cash flow rights; voting rights; squared terms of cash flow and of voting rights; totalassets; firm age; Delaware incorporation indicator; insider ownership; ROA; capex/assets; leverage; and R&D/sales.All variables are defined in Appendix A. Model 1 focuses on shareholder rights index, SRI; Model 2 - on board-relatedindex, BRI; Model 3 incorporates both indices; Model 4 focuses on individual governance provisions with inclusionof one variable at a time. All regressions include industry and year fixed effects, and all associated p-values reportedin parentheses are computed based on standard errors adjusted for heteroscedasticity and firm-level clustering. NObsis the number of firm-year observations, and R̄2 is R-squared. ***, ** and * denote statistical significance at at 1, 5,and 10% levels, respectively. The sample period is from 1996 to 2006.

1 2 3 4SRI -0.366 -0.343

(0.346) (0.373)BRI 1.029** 1.014**

(0.020) (0.025)Shareholder rights provisionsCall special meeting -0.1658

(0.528)Act by written consent -0.2899

(0.317)No poison pill 0.2095

(0.414)No staggered board 0.0532

(0.760)Cumulative voting rights -0.8003

(0.117)Board-related provisionsAll attend more than 75% of board meetings 0.1559

(0.302)CEO serves 2 or fewer outside boards -0.4767

(0.251)Outside directors>50% 0.321*

(0.072)Nominating composed solely of outsiders -0.0764

(0.749)Compensation composed solely of outsiders 0.2117

(0.190)5<board size<16 -0.4189

(0.315)Chairman and CEO are separated 0.2162

(0.276)CFR -4.003 -3.602 -3.774

(0.169) (0.194) (0.180)CFR2 6.009 5.821 6.033

(0.192) (0.196) (0.181)VR 1.395 0.973 1.407

(0.377) (0.487) (0.345)VR2 -1.026 -0.790 -1.115

(0.412) (0.489) (0.352)Control variables Yes Yes Yes Yes

Industry FE Yes Yes Yes Yes

Year FE Yes Yes Yes Yes

Intercept 2.748*** 1.657** 1.832**(0.002) (0.038) (0.025)

NObs 358 358 358 358

R̄2 52.65% 53.59% 53.84%

35

Table 7 Relationship Between Firm Value and Corporate Governance at DualClass Firms: Employing Interaction Terms

This table reports firm-level OLS regressions, where the dependent variable is industry-adjusted ln Q and the keyindependent variables are each of the following - High SRI, High BRI, Low SRI, Low BRI, as well as interactionterms among these variables. High (low) SRI or BRI are based on the subsamples of top (bottom) one-third offirms by SRI or BRI. Control variables are the same as those in Table 6. All variables are defined in AppendixA. Model 1 focuses on High SRI and BRI; Model 2 - on High SRI and Low BRI; Model 3 - on High BRI andLow SRI; and Model 4 - on Low SRI and BRI. All regressions include industry and year fixed effects, and allassociated p-values reported in parentheses are computed based on standard errors adjusted for heteroscedasticityand firm-level clustering. NObs is the number of firm-year observations, and R̄2 is R-squared. ***, ** and * denotestatistical significance at 1, 5, and 10% levels, respectively. The sample period is from 1996 to 2006.

1 2 3 4High SRI 0.134 -0.106

(0.391) (0.579)High BRI 0.323* 0.276**

(0.075) (0.029)Low SRI 0.288 0.334

(0.234) (0.158)Low BRI -0.773*** -0.371**

(0.002) (0.043)High SRI×High BRI -0.179

(0.561)High SRI×Low BRI 0.686*

(0.058)Low SRI×High BRI -0.053

(0.824)Low SRI×Low BRI -0.492

(0.214)CFR -3.599 -3.232 -3.844 -3.240

(0.191) (0.209) (0.172) (0.206)CFR2 5.740 5.243 5.882 5.215

(0.195) (0.212) (0.181) (0.204)VR 0.889 0.784 1.274 1.013

(0.538) (0.561) (0.415) (0.477)VR2 -0.662 -0.594 -0.903 -0.767

(0.570) (0.585) (0.474) (0.508)Control variables Yes Yes Yes Yes

Industry FE Yes Yes Yes Yes

Year FE Yes Yes Yes Yes

Intercept 2.271*** 2.271*** 1.890** 1.827**(0.009) (0.005) (0.034) (0.032)

NObs 358 358 358 358

R̄2 53.24% 54.67% 53.66% 55.07%

36

Table 8 Corporate Governance Changes at Dual Class Firms around UnificationEvents

This table presents 3- and 5-year means and medians (in brackets below mean values) of shareholder rights index, board-related index, and of individual governance provisions before and after unification events. We also report difference testsfor 3- and for 5-year governance values from before to after unification events. All variables are defined in AppendixA. NObs is the number of firm-year observations. Statistical significance is reported based on p-values associated withthe t-test for the difference in mean values and with Wilcoxon test for the difference in median values. ***, ** and *denote statistical significance at 1, 5, and 10% levels, respectively. No statistical significance is presented for individualgovernance provisions computed as proportions of firms with such provisions. The sample period is from 1996 to 2006.

t-5 t-3 t+3 t+5 Difference (-3,+3) Difference (-5,+5)Corporate Governance Mean Mean Mean Mean Mean Mean

[Median] [Median] [Median] [Median] [Median] [Median]SRI 0.80 0.79 0.63 0.62 -0.16*** -0.18***

[0.80] [0.80] [0.60] [0.60] [-0.20***] [-0.20***]BRI 0.58 0.60 0.69 0.70 0.09*** 0.12***

[0.60] [0.60] [0.71] [0.71] [0.11***] [0.11***]Shareholder rights provisionsCall special meeting 0.69 0.68 0.51 0.51 -0.17 -0.18

[1.00] [1.00] [1.00] [1.00] [0.00] [0.00]Act by written consent 0.66 0.64 0.53 0.52 -0.12 -0.13

[1.00] [1.00] [1.00] [1.00] [0.00] [0.00]No poison pill 0.73 0.73 0.53 0.54 -0.20 -0.20

[1.00] [1.00] [1.00] [1.00] [0.00] [0.00]No staggered board 0.57 0.59 0.46 0.45 -0.13 -0.12

[1.00] [1.00] [0.00] [0.00] [-1.00] [-1.00]Cumulative voting rights 0.79 0.81 0.79 0.81 -0.01 0.02

[1.00] [1.00] [1.00] [1.00] [0.00] [0.00]Board-related provisionsAll attend more than 75% of board meetings 0.73 0.70 0.55 0.55 -0.15 -0.18

[1.00] [1.00] [1.00] [1.00] [0.00] [0.00]CEO serves on 2 or fewer outside boards 0.70 0.75 0.66 0.65 -0.09 -0.05

[1.00] [1.00] [1.00] [1.00] [0.00] [0.00]Outside directors >50% 0.37 0.39 0.45 0.45 0.06 0.08

[0.00] [0.00] [0.00] [0.00] [0.00] [0.00]Nominating composed solely of outsiders 0.04 0.05 0.28 0.29 0.23 0.25

[0.00] [0.00] [0.00] [0.00] [0.00] [0.00]Compensation composed solely of outsiders 0.33 0.39 0.45 0.46 0.06 0.13

[0.00] [0.00] [0.00] [0.00] [0.00] [0.00]5<board size<16 0.86 0.84 0.69 0.66 -0.15 -0.20

[1.00] [1.00] [1.00] [1.00] [0.00] [0.00]Chairman and CEO are separated 0.27 0.27 0.18 0.19 -0.09 -0.08

[0.00] [0.00] [0.00] [0.00] [0.00] [0.00]NObs 426 219 268 486

37

Table 9 Unification Likelihood and Corporate Governance

This table reports firm-level Probit regressions, where the dependent variable is unification dummy indicator andthe key independent variables are individual governance provisions with inclusion of one variable at a time. Controlvariables include insider ownership; M/B; capex/assets; firm size; leverage; and sales growth rate. All variables aredefined in Appendix A. All regressions include industry and year fixed effects, and all associated p-values reported inparentheses are computed based on standard errors adjusted for heteroscedasticity and firm-level clustering. NObs isthe number of firm-year observations. ***, ** and * denote statistical significance at 1, 5, and 10% levels, respectively.The sample period is from 1996 to 2006.

Shareholder rights provisionsCall special meeting -0.675

(0.139)Act by written consent -1.728***

(0.003)No poison pill -1.054*

(0.050)No staggered board -0.582

(0.234)Cumulative voting rights -0.112

(0.881)Board-related provisionsAll attend more than 75% of board meetings -0.882

(0.103)CEO serves on 2 or fewer outside boards -1.389

(0.232)Outside directors>50% 0.958**

(0.049)Nominating composed solely of outsiders 0.507

(0.462)Compensation composed solely of outsiders 0.381

(0.441)5<board size<16 -0.136

(0.929)Chairman and CEO are separated 0.283

(0.595)

Control variables Yes

Industry FE Yes

Year FE Yes

NObs 282

38