The Effect of Internal and External Corporate Governance on Dual Class Firms
Young Sang Kim, Hoje Jo and Sang Lee
We examine the effects of internal and external corporate governance and monitoring mechanisms on the dual-class status and the firm value of dual-class firms. Employing 736 dual-class firms and 7,027 single-class firms in U.S., we find that dual-class firms tend to be larger, and have higher director ownership, higher institutional ownership, lower blockholdings, and a smaller fraction of independent directors on their boards than single-class firms. In addition, we observe that dual-class firms are followed by a smaller number of security analysts. After correcting for endogeneity bias, our results show that not only firms with higher analyst coverage, but also firms with higher analyst following and a lower wedge, measured as the difference between voting rights and cash flow rights, are strongly associated with Tobin’s q. In contrast, blockholders’ ownership, board independence, and institutional ownership play a relatively insignificant role in enhancing dual-class firm value. We interpret these results suggest that security analysts are one of the most effective monitoring mechanisms that influence both the dual-class choice and firm value. Our results are not attributed either to the difference in firm size or to an industry effect.