Extreme Governance: An Analysis of Dual-Class Companies in the United States

Question 1

What is the main idea behind the paper?

Answer 1

Research summarizes dual-class firms in the US, provides reasons for their existence and insights.

Question 2

What does low PBOC mean?

Answer 2

Strong protection of shareholder rights (they expect to get proper return)

Question 3

What do antitakeover defenses do?

Answer 3

They make it difficult to remove managers who run firms inefficiently and/or large PBOC. This leads to decrease in firm’s value through lower operating performance.

Question 4

What is a dual class firm?

Answer 4

1. Superior shares with ten votes per share, non-publicly traded. Owned by managers, insiders.
2. Inferior class, with one vote per share.

It provides insiders with majority of votes. Insiders have effective control over all corporate decisions, it makes them virtually immune to hostile takeovers.

Question 5

Which are bigger, single-class or dual class?

Answer 5

Dual-class firms are Bigger, more levered, older. No abnormal returns by dual-class companies are documented.

Question 6

How much insiders of dual_class own voting rights?

Answer 6

On average insiders own majority 60% of voting rights and minority of CF rights (40%),thus, they bear smaller financial consequences of their decisions.

Question 7

Who enjoys PBOC the most?

Answer 7

Superior shareholders.

Question 8

What predicts larger size of PBOC and thus dual-class structure?

Answer 8

1. Name (if named after founder).
2. Media. Control of media company provides opportunities for self-advertising, manipulating the public opinion.
3. Activity of the founder. If firm is young and founder still active, PBOC and dual-class are more likely.
4. Firms in the area & Sales of the area. The less firms there are in firm’s metropolitan area, the more likely firm is major employer, which entails private benefits for insiders with dual class shares.

Question 9

What is Charter amendments (Takeover defense)?

Answer 9

In firm’s charter, impose conditions on control transfer. (Require over 2/3 vote to approve merger).

Question 10

What is golden parachute? (Takeover defense)

Answer 10

An extremy lucrative severance package that is guaranteed to firm’s senior management if the firm is taken over.

Question 11

What are poison pills? (Takeover defense)

Answer 11

Destroy value of your shares. Securities embedded rights to buy shares in either target or an acquirer at a deeply discounted price.

Question 12

What is Pac man defense? (Takeover defense)

Answer 12

Buy firm that wants to buy you, effective is target is much bigger than bidder.

Question 13

Between what there is a loop of causality (ownership structure is a variable that is also determined by firm value and performance)?

Answer 13

Between ownership structure and firm performance.

Question 14

With what Firm value is positively associated?

Answer 14

With insiders cash-flow rights.

Question 15

With what firm value is negatively associated?

Answer 15

1. With insiders voting rights.
2. With the wedge between the insider voting and cash flow rights

Question 16

What is the main remark of research?

Answer 16

Despite that dual-class system can reduce value of the firm, majority owner can still rationally choose to sacrifice some of firm value to maintain PBOC.

Question 17

What is benefit of personal utility from controlling media company?

Answer 17

Personal utility can well outweigh financial losses of the firm.