7 - The Empirical Evidence on Dual-Class Stock

Summary

Although a great deal of uncertainty has surrounded the interpretation of dual-class stock empirical evidence, if studies that pertain to different types of firm performance are collated, emerging trends are evident.Event-based studies are the least useful, since the effect of dual-class stock creation or dissolution is often masked by contemporaneous events.More helpful are firm value studies, using Tobin’s Q or derivatives thereof, which generally show negative correlation between dual-class stock and firm value.However, buy-and-hold return studies show that investors earn as good (if not better) returns investing in notional portfolios of dual-class stock than matched one share, one vote firms, and the operating performance of dual-class firms is generally at least as good as matched one share, one vote firms.Although emerging evidence suggests that differences may subsist between different types of firms, with high-growth firms potentially benefiting the most from dual-class stock, overall, investors protect themselves from the perceived risks by pricing them in, and, in fact, discounting is arguably excessive.Rather than prohibiting dual-class stock, the conversation should shift to using public shareholder protections to reduce the cost of capital for such firms, since the evidence does not show that dual-class stock harms public shareholders.