Research Seminar Program - Hyunseob Kim (Chicago Fed)

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FBE-221 (Theatre 4)

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Title: Dynamic Incentive Effects of Dual-Class Shares: Theory and Evidence

Abstract: This paper studies dynamic effects of dual-class shares on entrepreneurial effort and corporate agency costs both theoretically and empirically. Dual-class shares provide strong incentives by protecting the entrepreneur from being fired in the future. As the firmmatures, however, increasing agency costs erode the value added from the heightened incentives. Using new panel data on US public firms’ voting rights spanning 1971–2020, we find that: (i) the voting premium of dual-class firms increases over firmmaturity; (ii) the market reacts positively to young single-class firms switching to dual-class but significantly less so to mature single-class firms; (iii) young dual-class firms have higher valuations than young single-class firms but the wedge shrinks over time and eventually reverses; (iv) dual-class firms’ investment and employment growth are less sensitive to investment opportunities; and (v) dual-class firms generate more patents with citations. As a whole, the combination of theoretical and empirical results is consistent with treatment effects of dual-class shares rather than selection, and provides new policy implications.