Agency Conflicts, Controlling Owner Proximity, and Firm Value: An Analysis of Dual‐Class Firms in the United States

Chun Keung Hoi · Ashok J. Robin

32 citations0/0 files storedCorporate Governance An International Review

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Corporate Finance and Governance Auditing, Earnings Management, Governance Family Business Performance and Succession

Abstract

ABSTRACT Manuscript Type: Empirical Research Question/Issue: The study seeks to understand whether the proximity of the largest shareholder (controller) to the locus of management – whether the controller is a top executive, a board member, or an outsider – determines the value of US dual‐class firms. Research Findings/Insights: Using a sample of 209 US dual class firms from the year 2000 and a corresponding control sample of single‐class firms, we run cross‐sectional regressions to determine the effect of the controller on firm value. We present robust evidence that dual‐class firm value is negatively related to controller proximity. Dual‐class structure overall is unrelated to firm value, because despite its negative effects with high proximity controllers there appear to be benefits when controller proximity is low (when the largest shareholder is an outsider). Theoretical/Academic Implications: Ownership structure is a widely studied subject but most studies focus on insider ownership. More nuanced aspects of ownership such as controller proximity are needed in empirical studies and theoretical models. These nuances could help us better understand the interplay between the incentive of various parties (e.g., managers, large shareholders) and the opportunity available for extraction of private benefits. Practitioner/Policy Implications: A practitioner implication is that shareholder of high‐proximity dual‐class firms must seek additional control mechanisms to curb agency costs. A policy implication is that investor protection (laws and institutional structure protecting shareholders) works only to a limited extent – it curbs overt acts of expropriation, but cannot eliminate acts engineered by insiders.

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References

1983Separation of Ownership and Control 1998Law and Finance 1988Management ownership and market valuation 1985The Structure of Corporate Ownership: Causes and Consequences 2005How do family ownership, control and management affect firm value?2002Disentangling the Incentive and Entrenchment Effects of Large Shareholdings 2002The ultimate ownership of Western European corporations 2002Corporate ownership structure and the informativeness of accounting earnings in East Asia

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2013Earnings management, audit committee effectiveness and the role of blockholders ownership: evidence from UK large firms 2013Measuring Corporate Governance: Lessons from the 'Bundles Approach'2018Does proximity to corporate headquarters enhance directors' monitoring effectiveness? A look at financial reporting quality 2017Secondary agency conflicts: A synthesis and proposed measurement model 2015Dual-class shares, external financing needs, and firm performance

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