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Agency Problems at Dual-Class Companies





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    • Ronald W. Masulis is from the Owen Graduate School of Management, Vanderbilt University; Cong Wang is from the Faculty of Business Administration, Chinese University of Hong Kong; and Fei Xie is from the School of Management, George Mason University. We thank Paul Gompers, Joy Ishii, and Andrew Metrick for generously sharing data on dual-class companies. We also thank Cam Harvey (the editor), an anonymous associate editor, an anonymous referee, Harry DeAngelo, Mara Faccio, Wi-Saeng Kim, Michael King, Lily Qiu, Anil Shivdasani, and seminar participants at Chinese University of Hong Kong, City University of Hong Kong, Nanyang Technological University, Peking University, San Diego State University, Vanderbilt University, the 2nd International Conference on Asia-Pacific Financial Markets, the 13th Mitsui Life Symposium on Global Financial Markets, 2007 FMA Annual Meeting, and 2007 European FMA Meeting for valuable comments. Cong Wang also acknowledges the financial support of a Direct Allocation Grant at CUHK (project ID: 2070391, 07-08).


Using a sample of U.S. dual-class companies, we examine how divergence between insider voting and cash flow rights affects managerial extraction of private benefits of control. We find that as this divergence widens, corporate cash holdings are worth less to outside shareholders, CEOs receive higher compensation, managers make shareholder value-destroying acquisitions more often, and capital expenditures contribute less to shareholder value. These findings support the agency hypothesis that managers with greater excess control rights over cash flow rights are more prone to pursue private benefits at shareholders’ expense, and help explain why firm value is decreasing in insider excess control rights.