The Value of Voting Rights to Majority Shareholders:Evidence from Dual-Class Stock Unifications
Shmuel Haur
Ben-Gurion University and Rutgers University
Beni Lauterbach
Bar-Ilan University
We study84dual-class stock unifications,where superior vote shareholders gave up their superior voting status(all firm stocks became‘‘one share one vote’’)and received(in most cas)compensation in the form of additional shares.
Unifications are esntially intrafirm transactions of voting rights,and afford obr-vation of the intrafirm-assd price of vote.The price of vote in unifications(1) increas with the percentage vote lost by the majority shareholders,(2)is higher in family-controlled firms,(3)decreas with institutional investor holdings,and(4)is similar to the‘‘outside’’price of vote implicit in the market prices of stocks.
The value of voting rights is an intriguing topic that has attracted extensive academic and practitioner in
terest before.Most of the existing evidence comes from examinations of dual-class stocks.In the dual-class stock system, the firm issues two class of common stock:superior-and inferior-vote stocks.Previous rearch documents a price premium of superior vote(over inferior vote)stocks,which illustrates the positive value of voting rights.1 In recent years,many dual-class firms decided to recapitalize their equity into single-class stocks.This was done by transforming all common stock class into‘‘one share one vote.’’The‘‘unification’’of stock class trend is evidenced in Canada[Amoako-Adu and Smith(2001)]and is gaining momentum in Europe as well.(Nokia and Lufthanza are recent examples.) We examine84dual-class share unifications on the Tel Aviv Stock Ex-change.Unifications are esntially sales of voting power from one class of investors to another.By monitoring the prices of the transactions,that is, by examining the compensation paid for the loss of the superior-vote status,we hope to provide relatively direct inferences on the value of vote. The comments of Yakov Amihud,Michael Fishman(the editor),Ehud Kamar,two anonymous referees, and minar participants at Hebrew University,Tel Aviv University,University of California at Los Angeles,the European Finance Association meetings,and the European Financial Management Associa-tion meetings are gratefully acknowledged.All remaining errors are our own.Address correspondence to Beni Lauterbach,School of Business Administration,Bar-Ilan University,Ramat Gan52900,Israel,or e-mail:lauteb@mail.biu.ac.il.
1The price premium ranges from5%to10%in the United States[Lea,McConnell,and Mikkelson(1983) and Cox and Roden(2002)]to82%in Italy[Zingales(1994)],with a typical value of10%to20%.
The Review of Financial Studies Vol.17,No.4ª2004The Society for Financial Studies;all rights rerved. doi:10.1093/rfs/hhg061Advance Access publication October15,2003
The Review of Financial Studies/v17n42004
Our main findings are(1)that the price of vote strongly depends on the position and perspectives of the majority shareholders.For example,the higher the vote loss of majority holders,the higher the marginal price of vote.(2)Compensation for vote loss is offered even when majority holders retain control of the firm.Vote appears valuable even beyond the50% absolute majority point.(3)Institutional investors also play a role—the compensation to majority holders is lower in firms with institutional hold-ings.(4)On average,the unification price of vote is about equal to the price of vote implicit in the market price premiums on superior vote stocks.
The article is organized as follows.Section1provides background on the rearch issues.Section2describes the sample.Section3reports the empirical findings.Section4concludes.
1.Background and Rearch Issues
1.1The‘‘inside’’and‘‘outside’’view of the value of voting rights
The value of voting rights has been approached from two directions:the value to a small shareholder from outside,and the value to‘‘inside’’majority holders.The value to a small outside shareholder is cloly related to the chance that the voting right will become pivotal,for example,in a control contest[Zingales(1995)].On the other hand,the value to(inside) majority holders is related to the superior cash flows they(the majority shareholders)can generate for the firm(providing they are in control)and to the private benefits they can extract—e the analysis in Grossman and Hart(1988)and Harris and Raviv(1988).Recent ,Burkart, Gromb,and Panunzi(1998)]further propos that dual-class capitaliza-tion helps majority holders achieve higher bid prices for the firm.
In this study we obrve both the‘‘outside’’price of vote(implicit in the market price premiums on superior vote stocks),and an intrafirm nego-tiated price of vote.We estimate the intrafirm price of vote from intrafirm transactions of voting power.In our sample of84dual-class stock uni-fications,superior vote stocks surrender their superior vote status and receive(in most cas)addition
al shares as compensation.The direct and‘‘pure’’exchanges of voting power for additional shares,initiated within the firm,offer a glimp at the intrafirm assd value of vote.
Previous empirical work such as Barclay and Holderness(1989)and Dyck and Zingales(2001)estimate the‘‘insider’’value of vote from block trades that typically transfer control.It is interesting to compare the block trade, unification,and market prices of vote.2
2We are the first to analyze the terms of the unifications and infer from them the value of vote.Other studies that mention unifications[Amoako-Adu and Smith(2001),for example]focus on the reasons for unifications—disputes between superior and inferior vote shareholders that diminish investor interest in dual-class stocks.
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The Value of Voting Rights to Majority Shareholders
1.2Dual-class capitalization and unification
Dual-class stocks are prevalent in majority-controlled firms across the globe.For example,Bergstrom and Rydqvist(1990)report that in the late1980s more than70%of the stocks listed on the Stockholm S
tock Exchange were dual class,and Zingales(1994)reports that about40%of the firms on the Milan Stock Exchange had dual-class stocks.The dual-class system facilitates investors’gmentation.The majority shareholders can concentrate on superior vote stocks and establish a majority vote at low costs(sometimes without even owning a majority of equity)—e DeAngelo and DeAngelo(1985).Other(‘‘outside’’)public investors,who are less interested in control,hold inferior vote stocks primarily,yet receive a fair share of the dividends.
At the end of1989,about40%of the firms traded on the Tel Aviv Stock Exchange(TASE)had dual-class stocks.The superior vote stocks were always‘‘one share one vote’’stocks,while the inferior vote stocks were typically‘‘five shares one vote’’stocks.In all cas,superior and inferior vote stocks had identical per-share dividend distributions.
In October1989the TASE together with the Israel Securities Author-ity(ISA)[the Israeli counterpart of the U.S.Securities and Exchange Commission(SEC)]banned new issues of inferior vote stocks.Compa-nies wishing to rai capital could only issue superior ,‘‘one share one vote’’)stocks.The new regulation entered into effect on January1990,and since then more than80firms have decided to unify their dual-class stocks.The unifications frequently preceded a asoned equity offer.3
孕妇可以补牙吗Since superior vote stocks were already‘‘one share one vote’’stocks, unification proceeded by transforming inferior vote stocks into superior vote stocks.Each inferior vote stock became a‘‘one share one vote’’stock at no cost to its owner.Sometimes though,the superior vote shareholders received compensation for agreeing to the stock unification.This com-pensation,when granted,was always in the form of additional‘‘one share one vote’’stocks issued by the company and distributed to superior vote shareholders free of charge.
An example can be uful.Suppo firm X has two superior vote stocks (with‘‘one share one vote’’)owned by the majority shareholders,and five inferior vote stocks(with‘‘five shares one vote’’)owned by the public. Upon unification,each inferior vote stock becomes a‘‘one share one vote’’stock and the superior vote stocks remain‘‘one share one vote.’’If the unification proceeds with no compensation,the voting power of the majority holders(who held all superior vote stocks before the unification) 3Interestingly,since the new regulation inception in January1990,there have been no issues of superior vote stocks.That is,all dual-class companies that raid equity unified their stocks before the asoned equity offering.
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declines from 2/3to 2/7,while their share in equity remains 2/7.If compensation is offered,say by granting (via private placement and for free)one additional ‘‘one share one vote’’stock to the majority holders,their share of vote drops from 2/3to 3/8,while their share in equity increas from 2/7to 3/8.
It is noteworthy that a unification with compensation required ratifi-cation by the ISA (becau it involved issuing more stocks),and a supermajority (75%)approval in veral shareholder meetings,including a meeting of inferior vote shareholders only.The ISA asked the com-pany for a small prospectus-like document (that usually accompanies private placements)and an expert opinion on the compensation pro-pod.In many cas there were objections to the unification proposals,and the company had to cut compensation.The ‘‘troublemakers’’were always institutional investors,primarily mutual funds.4Thus,often the process of unification with compensation took almost a year.In con-trast,unifications without compensation were completed within a couple of months,and required only approval in shareholder meetings,and filing a short standard ‘‘Immediate Report’’on the firm’s decision to the ISA and TASE.
1.3Measuring the value of voting rights
警察常服1.3.1Inferring the value of vote from the market prices of dual-class stocks.The price of vote can be
estimated from the price premium of superior (over inferior)vote stocks.Let i be an index for stock class:i ¼1for the superior vote stocks and i ¼2for the inferior vote stocks;N i be the number of shares in stock class i ,g be the number of inferior vote stocks needed for one vote;and P i be the market price of stock class i .An investor who swaps stock class 1for stock class 2experiences the following changes:
漂流书
4For example,in the unification of Supersol,a large supermarket chain firm,the expert recommended a compensation of 15%to superior vote shareholders.Several mutual funds expresd discontent,hence the board hired another expert.Following this cond expert opinion report,the board decided to propo a compensation of 10.75%.In the final shareholder meetings,a few mutual funds revolted again and the company compromid on a compensation of 9.75%.
Cash flow Change in %equity
Change in %vote Sell 1stock 1
P 1À1N 1þN 2À1N 1þN 2=g Buy P 1P 2stock 2ÀP 1
P 1P 2 1N 1þN 2P 1P 2 1=g N 1þN 2=g Total —P 1P 2À1 1N 1þN 2P 1P 2g À1 1N 1þN 2=g The Review of Financial Studies /v 17n 42004
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双十一促销>现在做什么生意最好
The price of vote implicit in the market transactions is denoted MPVR:
MPVR¼ÀD Equity
D Vote络腮胡子
¼
P1
P2
À1
Á
1
N1þN2
1À1
P2g
Á
N1þN2=g
:ð1Þ
The above MPVR formula asss the price of vote in terms of firm equity,that is,asss,at the margin,the percent of firm equity1%of firm vote costs.MPVR has the same measurement units(D Equity/D Vote) as the price of vote estimates that can be extracted from unifications and from block trades.Thus it is particularly suitable for comparisons with other value-of-vote measures.
如何申请qq邮箱1.3.2Unification-bad estimates of the value of vote.Dual-class stock unifications can be perceived as simple sales of voting rights by superior vote to inferior vote shareholders.Alternatively,since voting rights are particularly important to majority shareholders,dual-class unifications can also be perceived as sales of voting rights by majority shareholders to the rest of the shareholders.To clarify,majority shareholders are the control group of the firm,that is,the group of large shareholders
who together dominate vote in the firm.
Consider the majority shareholders,and let,in addition to the previous definitions,COMP¼total number of class1stocks granted as compensa-tion,a i¼the share of majority holders in stock class i,v c¼the proportion of total vote controlled by the majority holders,and e c¼the proportion of total equity owned by the majority holders.The price of voting rights as perceived by the majority shareholders(PVR c)is their gain in equity divided by their loss in vote:种子的拼音怎么写
PVR c¼ÀD e c
D v c
¼
e cðafterÞÀe cðbeforeÞ
v cðbeforeÞÀv cðafterÞ
¼½a1ðN1þCOMPÞþa2N2
ðN1þN2þCOMPÞ
À
ða1N1þa2N2Þ
ðN1þN2Þ
1122
ðN1þN2=gÞ
À1122
ðN1þN2þCOMPÞ
:
ð2Þ
The analysis can be repeated from the perspective of superior vote shareholders simply by tting a1¼1and a2¼0in the equations above. Interestingly,it can be shown that the price of vote paid to superior vote shareholders is PVR1¼D e1/D v1¼PVR c,the price of vote that majority holders receiv
e.That is,the price of vote is independent of who perspec-tive we take.5
5The only exception is when a
1¼a2,in which ca PVR c is undefined,while PVR1is well defined.
The Value of Voting Rights to Majority Shareholders
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1.4Who determines the unification price of vote?
Another interesting question is who determines the price of vote in uni-fications,all superior vote shareholders as a group,or the majority share-holders alone?
The properties of D v c,the change in majority shareholders’voting power upon unification,are different than tho of D v1,the corresponding change in class1(superior vote)shareholders’voting power.This is best illustrated by considering the ca of a1¼a2.If a1¼a2,that is,if the majority shareh
olders hold equal proportions of superior and inferior vote stocks,then D v c is zero regardless of the compensation to the superior vote(class1)stocks.For example,if the majority group holds70%of the inferior vote stocks and70%of the superior vote stocks,its share in firm vote and equity remains70%,regardless of the compensation paid.
In such a ca(of a1¼a2),the majority shareholders definitely prefer zero compensation becau they would not lo any voting power and becau unifications with zero compensation are quicker and cheaper.6 Unifications without compensation also receive better public relations becau of the public’s impression that the majority owners gave up one of their superior rights for free.
Alas,the zero-compensation unifications are always against the interests of the superior vote(class1)shareholders as a group becau in such unifica-tions shareholders who own only class1shares lo voting power without any compensation.Evidently there exist conflicts of interest between the majority shareholders and some of the superior vote(class1)shareholders.
If majority shareholders dominate the unification decision,there would be no compensation when the majority shareholders are not hurt at all or are not hurt much by a zero compensation unification.This happens when a1<a2(in which ca the majority shareholders’voting power increas following a ze
ro-compensation unification),when a1¼a2(D v c¼0),and when a1>a2(majority shareholders lo vote)but the loss in voting power is not large enough to justify a costly compensation process.In contrast,if unifications were sales of voting rights by class1shareholders, compensation would always be positive regardless of a1and a2.
We hypothesize that the majority shareholders dominate the unification decision,that is,that the correct view is that unifications are sales of vote by majority holders to the rest of the shareholders.
2.Data and Sample Description
In the period1990–2000there were87dual-class stock unifications on the Tel Aviv Stock Exchange,84of which are included in the sample.Three 6The monetary cost of a unification with compensation is assd(by an ISA expert)to be in the order of 100to200thousands dollars.Thus,the main cost of a unification with compensation is the time and energy consumed during the bargaining and unification ratification process.
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