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The one-share-one-vote-rule and managerial compensation.

In a study of British dual-class firms, Ang and Megginson (1989) found that positive wealth effects were realized by shareholders after firms announced dual-class recapitalizations. Their evidence, though not entirely consistent with several other papers to be discussed later, suggested that insiders act on behalf of shareholder interests when issuing restricted voting shares. Nonetheless, policymakers and exchanges in the United States and elsewhere are currently considering curtailing the ability of firms to issue dual-classes of shares.

The distribution of voting power among security holders will affect wealth levels of investors. Voting rights are normally associated with shares of equity, either on a one-share-one-vote basis or such that voting rights vary among share classes. While the one-share-one-vote rule has been the tradition in the United States, increasing numbers of firms with multiple classes of shares are being listed on the exchanges.(1) Firms listed in Canada, Europe, Israel, etc., have long issued multiple classes of shares. This paper is concerned with one-share-one-vote optimality and explaining how firms might determine the assignment of voting rights.

Levy (1983) and Blair et al., (1989) both provide evidence establishing that voting rights are valued by the market. Easterbrook and Fischel (1983) argue that voting rights provide a mechanism for assignment of control when it is impractical to do so by contractual arrangement.

Dual-class recapitalizations permit firms to separate control from claims to dividend income. Such separation may shield managers from shareholder discipline, enabling managers to extract increased private benefits. The impact of dual-class recapitalizations is not clear. For example, Partch (1987) finds no evidence of shareholder wealth reductions resulting from dual-class recapitalizations. However, after expanding the data-set of Partch from 44 firms to 94 and including recapitalizations from 1984 to 1987, Jarrell and Poulsen (1988) find that shareholders experience significant negative abnormal returns from dual-class recapitalization announcements. Cornett and Vetsuypens (1989) find evidence of abnormal price increases around announcements of dual-class recapitalizations. Moyer et al., (1989) and Moyer et al., (1993) find that substitutability exists among monitoring alternatives, suggesting that ownership of voting power by management need not exacerbate agency problems.

Grossman and Hart (1988) and Harris and Raviv (1988) also consider the relationship between voting assignments among shareholders and security values. Incumbent and rival management teams bid for the opportunity to control the firm. These papers present situations where firms with multiple classes of shares outstanding will be controlled by inferior management teams, leading to reduced firm and security values. In these scenarios, the firm's issuance of multiple classes of shares will be dominated by the one-share-one-vote rule in that inferior management teams will not be appointed to run single-voting-class firms. These models assume that inferior class shareholders are passive with respect to the appointment and compensation of management teams. These models are constructed such that management teams have no incentive to maximize inferior class share values. Therefore, superior class shareholders are able to convert firm value into private benefits rather than into increased security values. Superior class shareholders may also sell their superior class shares to an inferior management team which, in turn, may be able to realize for itself higher private benefits from the firm.

Results of these papers lead one to question why so many firms, particularly outside of the United States, issue multiple classes of shares. Under what circumstances might issuance of dual-classes of shares not be dominated by the one-share-one-vote rule? Furthermore, how would the optimality of the one-share-one-vote rule be affected if shareholders of different classes were able to write binding contracts with respect to managerial compensation and golden parachute packages? This paper is intended to extend the results of Grossman-Hart and Harris-Raviv to address these issues. Results of this paper suggest that if shareholders are able to collaborate through a board, they would be willing to offer increased compensation to a superior incumbent management team, preventing it from selling out to an inferior management team. Furthermore, shareholders could offer an inferior management team a severance package to induce it to permit a takeover by a superior rival management team. The model will demonstrate that in a Nash Equilibrium, the superior management team will control the firm under all circumstances. Furthermore, under certain circumstances, current shareholders will be able to extract a greater share of takeover surplus under dual-class capitalization than under single-class capitalization.

The Model


We begin by assuming that the corporate charter is written by an entrepreneur intending to maximize the total value V of the firm, including security benefits y and private benefits z realized by management and managerial compensation paid to the shareholder manager. The entrepreneur may issue either one or two classes of equity. Dual-classes of equity will be distinguished by distribution of rights to vote and rights to receive dividend income. If the firm issues a single-class of equity, it will associate one vote with each share of stock. For sake of simplicity, we will assume that if the firm issues dual-classes, only one class will vote (Class A), and only one class will receive dividend income (Class B).(2) The total value of the single-class firm [V.sub.AB] will include both security and private benefits. Voting class shares in the dual-class firm will have value [V.sub.A] equal to the sum of managerial compensation and private benefits realized by the management team; income shares will have value [V.sub.B] equal to the value of income (security benefits) generated by the firm after managerial compensation and private benefits are taken by management. We will define private benefits realized by the management to include "perqs" referred to by Jensen and Meckling (1977). We will assume that managers will always consume the maximum level of private benefits that they are able; their consumption of private benefits is constrained only by threat of lawsuit by outside shareholders or by agreement with outside shareholders. Managerial compensation will include salary, bonuses and other consideration specified by employment contracts with shareholders. Thus, Class A shareholders receive all non-security benefits not realized by Class B shareholders. Thus, in the model presented here, shareholders are able to use managerial compensation to attract the superior management team. This ability can be used by shareholders to ensure the firm's employment of a superior management team. Here, as in the Grossman and Hart study, we will define the superior management team to be that team which maximizes the total value of the firm's assets. However, this definition will disregard the distribution of payoffs generated by the firm.

Assume that there exists a rival management team R competing against the incumbent team I for control of a given single-class firm. For sake of simplicity, further assume that a change in control is realized only after the rival management team has made an unrestricted offer (only unrestricted offers for a given class will be permitted) for the voting shares of the firm and has purchased a controlling majority of those shares. Let [y.sub.I] equal the security benefits generated by the incumbent management team I and [y.sub.R] equal the security benefits generated by the rival management team R. Private benefits generated by the incumbent management team equal [z.sub.I] and private benefits generated by the rival management team equal [z.sub.R]. The opportunity cost to management of accepting employment will be assumed to be zero. Thus, following the analysis of Grossman-Hart, contestants for control bid only for any and all of the shares of a given class.

A wealth-increasing transaction may result in surplus which will be distributed among its participants. This surplus reflects distributable wealth in excess of the sum of minimum levels the agents will accept given their opportunity costs and bargaining positions. We define [[Theta].sub.I] (0 [less than or equal to] [[Theta].sub.I] [less than or equal to] 1) to be the fraction of takeover surplus to be taken by the incumbent management team (or all shareholders in the case of single-class capitalization) from the rival in the event of a takeover. The proportion of this surplus taken by the incumbent team will be determined exogenously (except where noted) to the model presented here and will not affect model results. In certain scenarios, a superior incumbent management team might create a surplus of security benefits relative to the rival management team. Let [[Alpha].sub.I] (0 [less than or equal to] [[Alpha].sub.I] [less than or equal to] 1) be the fraction of this managerial surplus taken by the superior incumbent management team from outside shareholders as inducement to refuse a takeover attempt by an inferior rival; let [[Alpha].sub.I] (0 [less than or equal to] [[Alpha].sub.I] [less than or equal to] 1) also represent the fraction of managerial surplus taken by an inferior incumbent management team from outside shareholders as inducement to accept a takeover attempt by a superior rival.

Private benefits [z.sub.j] realized by a given management team j (either the incumbent I or the rival R) are considered here to be contractually limited or to be restrained by threat of lawsuit filed by shareholders against management. It will be assumed here that shareholders may agree to raise compensation of managers if shareholders (of both classes if two exist) maintain higher wealth levels by continued employment of this management team with its higher compensation level than with their next best alternative management team. This condition will hold regardless of whether the management team receiving the higher compensation level is the incumbent or a newly installed rival team.

The One-Share-One-Vote Rule

Following Grossman and Hart (1988) and Hams and Raviv (1988), we assume two contestants for control of the firm, an incumbent management team I and its rival R. To acquire the firm, the rival management team must make an unrestricted offer for the shares of the firm. Table 1 summarizes results of the One-Share-One-Vote rule. The incumbent will retain control if [y.sub.I] + [z.sub.I] [greater than] [y.sub.R] + [z.sub.R] (Scenarios 1 to 3) since the rival will not be able to outbid incumbent management for control, and total firm value will be:

[V.sub.AB] = [y.sub.I] + [z.sub.I] (1)

However, these scenarios merit further discussion. The security benefits associated with these shares are worth [y.sub.I] to the current shareholders; [y.sub.I] is the minimum selling price acceptable to outside shareholders. The rival would be willing [TABULAR DATA FOR TABLE 1 OMITTED] make an unrestricted offer to purchase shares for as much as [y.sub.R] + [z.sub.R] if a controlling interest in the firm can be acquired from outside shareholders. This price clearly produces a profit opportunity for outside shareholders when [y.sub.R] + [z.sub.R] [greater than] [y.sub.I] and outside shareholders hold a controlling interest in the shares. Outside shareholders would be willing to sell their shares to the rival management team, who would assume control of the firm, causing the incumbent management team to lose its private benefits [z.sub.I]. The incumbent management team will be able to prevent a value decreasing takeover by the rival and protect its private benefits by one of the following:

1. Maintaining a majority of single-class shares under its own control such that the rival management team cannot obtain a majority from outside shareholders.

2. Accept a reduction [[Delta].sub.I] in its own compensation package and/or private benefit consumption such that [[Delta].sub.I] [greater than] ([y.sub.R] + [z.sub.R] - [y.sub.I]). In effect, the incumbent management team makes a side payment to outside shareholders [[Delta].sub.I] for the opportunity to maintain its employment and retain its private benefits [z.sub.I].

3. Issue dual-classes of shares and retain a controlling fraction of voting shares.

Note that the opportunity to alter incumbent management compensation packages alters the distribution of firm value in favor of outside shareholders. This distribution does not change total firm value.

In the event where [y.sub.I] + [z.sub.I] [less than] [y.sub.R] + [z.sub.R] (scenarios 4-6), the rival will obtain control from the incumbent by bidding:

[V.sub.AB] = MAX[[y.sub.R] + [[Theta].sub.I] [z.sub.R], [y.sub.I] + [z.sub.I] + [[Theta].sub.I]([z.sub.R] - [Z.sub.I] + [y.sub.R] - [y.sub.I])](2)

leaving the rival with a profit equal to MAX[(1 - [[Theta].sub.I])[z.sub.R], (1 - [[Theta].sub.I])([y.sub.R] + [z.sub.R] - [y.sub.I] - [z.sub.I])]. Two key values play a role in Equation 2:

1. [y.sub.I] + [z.sub.I]: Incumbent shareholder-managers will not tender their shares unless they receive full compensation for both their security benefits and their private benefits. Outside shareholders require at least [y.sub.I] to tender their shares; they may be willing to make a side payment to managers in the event that the offer for shares exceeds [y.sub.I]. Shareholders would also expect to receive proportion [[Theta].sub.I] of the takeover surplus ([z.sub.R] - [z.sub.I] + [y.sub.R] - [y.sub.I]).

2. [y.sub.R]: Due to the free-rider problem, no shareholder will be willing to tender shares for a value less than its value under the rival, [y.sub.R]. Hence, shareholders would expect to receive at least this value, plus some fraction [[Theta].sub.I] of private benefits generated by the rival.

Thus, the value of the firm under the One-Share-One-Vote rule equals:

[V.sub.AB] = MAX[[y.sub.R] + [[Theta].sub.I] [z.sub.R], [y.sub.I] + [z.sub.I] + MAX[0, [[Theta].sub.I]([z.sub.R] - [z.sub.I] + [y.sub.R] - [y.sub.I])]](3)

The incumbent management team will not tender shares unless it receives at least [y.sub.I] + [z.sub.I]. If a takeover does occur, existing shareholders will receive at least fraction [[Theta].sub.I] of the takeover surplus.

Due to the free-rider problem, [[Theta].sub.I] = 1 in the Grossman-Hart model. In the model presented here, [[Theta].sub.I] will fall within the range [0, 1], being a function of the ability of the rival management team to extract takeover surplus in the form of managerial compensation. This difference in assumptions, however, does not drive the important differences in the results of the papers. In each case above, the firm will be managed by its highest bidder, which will be the superior management team. The One-Share-One-Vote rule leads to employment of the most efficient management team; that is, total asset value is maximized under the management team selected under the One- Share-One-Vote rule. However, we will demonstrate that in the event a takeover is required to realize this value, shareholder wealth is not necessarily maximized under the One-Share-One-Vote rule due to surplus realized by the acquirer. Single-class capitalization will be shown never to produce greater firm value than dual-class capitalization in the following sections.

Dual-class Capitalization

Under scenarios with dual-class capitalization, management teams hold Class A voting shares while outside shareholders hold Class B income shares. Figure 1 describes the potential bids offered by a rival management team along with the reactions of Class A and Class B shareholders to these bids. As in Table 1 under single-class capitalization, six potential Nash Equilibrium results may be realized, depending on relative values of [Z.sub.I], [y.sub.I], [z.sub.R] and [y.sub.R].

Table 2 summarizes firm control contest results along with security values and managerial payoffs under dual-class issuance. In the event that total firm value under the incumbent management team exceeds total firm value under the rival team (Scenarios 1 to 3), the incumbent will retain control. This outcome is obvious in Scenarios 1 and 2 where private benefits [z.sub.I] under the incumbent team exceed private benefits [z.sub.R] that might be realized by the rival team. Since the sum of private and security benefits under the incumbent team is higher, the rival team in Scenario 1 will never be able to enter a bid sufficiently high to induce the incumbent team to give up its private benefits. In Scenario 2, Class B shareholders will never be able to offer a severance package sufficiently high to induce managers to give up control of the firm. That is, the offer by Class B shareholders [X.sub.B] [less than] [z.sub.I] - [z.sub.R] will not be sufficient to induce management team to depart.


On the other hand, if the rival team were able to generate higher private benefits ([z.sub.R] [greater than] [z.sub.I]), while the incumbent team generated higher security benefits ([y.sub.I] [greater than] [y.sub.R]) as in Scenario 3, outside shareholders would prefer to retain the incumbent team. The rival management team would be willing to pay up to [z.sub.R] for controlling A Class shares; A-Class shareholders would be willing to accept this payment since their private benefits are only [z.sub.I]. Obviously, B Class shareholders would prefer retention of the incumbent team since the rival would reduce security benefits by [y.sub.I] - [y.sub.R]. To keep A-Class shareholders from tendering their shares to the rival, B-Class shareholders would be willing to make a side payment [X.sub.B] (perhaps in the form of higher wages or incentive compensation) of up to [y.sub.I] - [y.sub.R] to A-Class shareholders. Grossman-Hart and Harris-Raviv prohibit these types of payments on the grounds that outside shareholders are infinitesimal and too dispersed to be able or willing to agree to such payments. A free-rider problem would exist in that no single shareholder would be willing to make such a payment. However, a corporate board acting on behalf of shareholders can simply increase managerial compensation with impunity from lawsuits since shareholders benefit from retaining the superior management team at the higher pay rate. Since the rival is willing to pay a maximum of [z.sub.R] to obtain controlling A Class shares, B-Class shareholders will make a side payment of [z.sub.R] - [z.sub.I] to retain the management services of A-Class shareholder/managers. This will prevent a takeover by the rival team. B-Class shareholders benefit from the side payment to A-Class shareholders in that their wealth level under management by the incumbent ([y.sub.I] + [z.sub.I] - [z.sub.R]) is higher than under management by the rival ([y.sub.R]). Unlike in the Grossman-Hart scenario, the superior incumbent management team is able to retain control due to the side payment made by B-Class shareholders.

In Scenarios 4 through 6, the rival management team generates higher firm value than the incumbent management team; that is, [y.sub.R] + [z.sub.R] [greater than] [y.sub.I] + [z.sub.I]. In scenario 4, incumbent managers draw higher private benefits from the firm than the rival team would draw, rendering the rival unable to purchase controlling Class A shares from incumbent managers without the assistance of Class B shareholders. Where the free rider problem exists, Class B shareholders would be unwilling to sell their shares to the rival management group for less than [y.sub.R]. Thus, for the superior rival management team to secure control of the firm from the incumbent team drawing higher private benefits, Class B shareholders may prevent the free-rider problem by having instituted a golden parachute provision in the corporate charter. This severance pay provision for [Mathematical Expression Omitted] will enable the incumbent management team to retain its wealth level [z.sub.I] in the event of a takeover. In this scenario, Class B shareholders' net wealth level after the side payment to Class A shareholders (golden parachute provision) is given by:

[Mathematical Expression Omitted] (4)

Thus, the superior rival obtains control of the firm, Class A shareholders receive [Mathematical Expression Omitted] such that total payoffs to the firm's shareholders equal [y.sub.R] + [z.sub.R]. All of the takeover surplus is retained by existing shareholders. The golden-parachute provision or compensation increase permits the superior rival to assume control of the firm. This change in control would not be pertained in the Grossman-Hart scenario. Dual-class ownership structure and the ability to alter managerial compensation results in higher firm value than would be the case in the Grossman-Hart dual-class scenario or under the single-class scenario presented here.

In scenario 5, the firm would generate higher private benefits to the rival management team than to the incumbent team, but the incumbent team generates higher security benefits to Class B shareholders. Total benefits are higher under the superior rival team. Class B shareholders would prefer that the incumbent management team retains its position. This would enable Class A shareholders to draw a higher compensation level by [y.sub.I] - [y.sub.R] from Class B shareholders attempting to retain the incumbent management team. Thus, to obtain controlling Class A shares, the rival must pay at least [z.sub.I] + [y.sub.I] - [y.sub.R]. The rival is willing to do so since [z.sub.R]- [z.sub.I] [greater than] [y.sub.I] - YR in scenario 5. The takeover will be consummated and B-Class shareholders will receive the smaller security benefits [y.sub.R]. A-Class shareholders will receive value equal to their own private benefits [z.sub.I], the extra compensation [y.sub.I] - [y.sub.R] they would have been paid by Class B shareholders to retain their positions plus some proportion [[Theta].sub.I] of the total takeover surplus ([z.sub.R] - [z.sub.I] + [y.sub.R] - [y.sub.I]):

[V.sub.A] = [z.sub.I] + ([y.sub.I] - [y.sub.R]) + [[Theta].sub.I]([z.sub.R] - [z.sub.I] + [y.sub.R] - [y.sub.I])(5)

Note that since [V.sub.B]= [y.sub.R], [V.sub.A] + [V.sub.B] in Scenario 5 under dual-class capitalization is identical to [V.sub.A + B] under single-class capitalization.

In scenario 6, the rival's takeover offer to the incumbent exceeds private benefits realized by the incumbent. B-Class shareholders prefer the rival and make no effort to retain the incumbent team. In fact, Class B shareholders would be willing to offer to Class A shareholders a severance package of [[Alpha].sub.I]([y.sub.R] - [y.sub.I]) such that [[Alpha].sub.I] [less than] 1. Thus, the takeover offer is accepted by the incumbent management team and share values are given as follows:

[V.sub.A] = [z.sub.I] + [[Theta].sub.I]([z.sub.R] - [z.sub.I]) - [[Alpha].sub.I]([y.sub.R] - [y.sub.I]) [V.sub.B] = [y.sub.R] - [[Alpha].sub.I]([y.sub.R] - [y.sub.I]); [V.sub.A] + [V.sub.B] = [y.sub.R] + [z.sub.I] + [[Theta].sub.I]([z.sub.R] - [z.sub.I]) (6)

Firm value in Scenario 6 under dual-class capitalization exceeds firm value under single-class capitalization.

Note that the superior management team controls the firm under each of the six scenarios, unlike in the cases presented by Grossman-Hart and Harris-Raviv. Second, notice that total firm value under dual-class issuance equals or exceeds that under single-class issuance under each of the six possible scenarios. Careful examination and comparison of Equations 3 and 7 will reveal that dual-class capitalization will result in higher firm value than the One- Share-One-Vote rule under scenarios 4 and 6:

[V.sub.A] + [V.sub.B] = MAX{[y.sub.I] + [z.sub.I], [y.sub.R] + MIN[[z.sub.R], [z.sub.I] + [[Theta].sub.I]([z.sub.R] - [z.sub.I])]} (7)

Again, unlike the cases presented by Grossman-Hart and Harris-Raviv, the superior management team controls the firm under each scenario. In Scenarios 4, and 6, the dual-class ownership structure may allow the existing shareholders to extract a larger fraction of takeover surplus than under the single-class structure; under no scenarios do existing shareholders receive a smaller proportion of the takeover surplus. However, it should also be noted that the ability to extract side payments increases the net wealth of Class A shareholders at the expense of Class B shareholders.

Dual-Class Recapitalization

The empirical evidence regarding share price reactions to dual-class recapitalizations is mixed. Jarrell (1984) and Jarrell and Poulsen (1988) find that shareholder wealth is adversely affected by dual-class recapitalization. However, this does not necessarily imply that firm value, which includes private benefits enjoyed by managers, declines as a result of the recapitalization. Traded share prices after recapitalization need not reflect increased control benefits conferred on management since these benefits are not likely to be traded. Furthermore, the dual-class recapitalization may enable managers to maintain their firm-specific human capital wealth. That is, issuance of dual-classes of shares may prevent outside shareholders from "selling out" management by tendering shares to any rival bidder for a value greater than [y.sub.I] so as to deny managers private benefits (See discussion pertaining to Scenarios 1, 2 and 3 in the One-Share-One Vote Rule section). The empirical results of Ang and Megginson (1989) seem consistent with the hypotheses offered in this paper. Thus, the ability of the shareholders to make side payments to incumbent managers in the event of a takeover offer enables incumbent managers and outside shareholders to prevent value reducing takeovers that may occur in the Grossman-Hart and Harris-Raviv scenarios.

Consider the case where the firm currently has a single-class of stock outstanding with the value [y.sub.I] and that managerial private benefits have value [z.sub.I]. For the sake of simplicity, assume that management owns no shares, so that its wealth is [z.sub.I]. A rival offering [y.sub.I] + [[Theta].sub.I]([y.sub.R] - [y.sub.I] + [z.sub.R]) for shares may successfully take over the firm without compensating current management for its private benefits.(3) Clearly, management has an incentive to re-issue shares in a manner which enables it to retain control, since its wealth exceeds zero and equals [z.sub.I] only if both [y.sub.I] [greater than] [y.sub.R] and [z.sub.I] [greater than] 0. Class B shareholder wealth level is [V.sub.B] = [y.sub.I] + MAX[[[Theta].sub.I]([y.sub.R] - [y.sub.I] + [z.sub.R]),0]. Class A shareholder wealth levels will never exceed the levels under the dual-class scenarios presented earlier; Class B shareholder wealth levels may be greater (or less) than those under the dual-class scenarios, depending largely on the level of private benefits [z.sub.I] taken by incumbent management. As [z.sub.I] increases, dual-class recapitalization will result in a greater transfer of wealth from Class B to Class A shareholders. However, this recapitalization will also lead to higher takeover premiums paid by rival management teams as [z.sub.I] increases.

Summary and Conclusions

This paper has examined the optimality of the One-Share-One-Vote rule versus the issue of dual classes of shares. Theoretical papers by Grossman-Hart and Harris-Raviv permit an inferior management team to obtain control of the dual-class firm if its private benefits exceed those of its competitor for control. The model constructed in this paper permits inferior class shareholders to make a side payment to obtain or retain the services of the superior management team (essentially by permitting payment of increased managerial compensation) in the event that the superior team generates lower private benefits than its competitor. Thus, by making the side payment, inferior class shareholders ensure that the firm is managed by the team which maximizes firm value. These side payments are not permitted by Grossman-Hart or Harris-Raviv because inferior class shareholders are assumed to be infinitesimal, widely dispersed and not capable of negotiating managerial compensation. Furthermore, in these earlier papers, a free-rider problem exists in that each individual shareholder would prefer not to make this side payment to the superior management team himself. However, in the model presented here, a board acting on behalf of shareholders may increase the compensation (or offer a severance package) of the incumbent management team if this is necessary to induce the management team to remain (or depart). In the case of dual-class issuance, inferior voting-class shareholders do not object since the firm will be managed by the superior management team and their wealth is still higher than it would have been under the inferior management team. Thus, in the scenarios presented in this paper, the superior management team will always be able to assume control when the firm issues dual-classes of shares. While single-class issues never dominate dual-class issues, they generally result in equal share values when incumbent management teams are superior to rivals.

An additional potential benefit of dual-class issuance is that existing security holders will be able to extract a greater takeover surplus from a rival management team in the event of a takeover. Also, this paper has noted that dual-class recapitalizations need not result in firm value reductions; however, they may lead to transfers of wealth from shareholders to managers. Thus, reductions observed in share prices in certain empirical studies may not reflect reductions in firm values, but instead, transfers of value from traded securities to non-traded private benefits.

Acknowledgement: This paper has benefitted substantially from useful comments made by an anonymous referee. An earlier version of this paper was entitled "Managerial Compensation and the Optimality of Dual-Class Capitalization."


1. As of March 1994, 18 companies listed two classes of common stock on the NYSE; a much larger number of companies with dual-classes listed one of their classes on the exchange. The American Stock Exchange and OTC markets have traditionally been more accommodating towards multiple-share classes.

2. This assumption follows the Grossman and Hart paradigm.

3. This scenario contrasts the earlier case in that managers and shareholders act as separate classes. Shareholders may tender their shares without regard for private benefits [z.sub.I]. Thus, in this case, the firm may be sold to a rival which reduces its total value; that is, [y.sub.R] + [z.sub.R] may be less than [y.sub.I] + [z.sub.I]. In this case, shareholders receive [y.sub.R] - [[Theta].sub.R]([y.sub.R] - [y.sub.I]) for their shares, where rival management increases its compensation by [[Theta].sub.R]([y.sub.R] - [y.sub.I]) as its reward for increasing share value. Incumbent management receives nothing.


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Title Annotation:voting rights of shareholders
Author:Teall, John L.
Publication:Review of Financial Economics
Date:Mar 22, 1997
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