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Review of Quantitative Finance and Accounting

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01.05.2016 | Original Research

Dual-class versus single-class firms: information asymmetry

verfasst von: Lucy Lim

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 4/2016

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Abstract

I examine information asymmetry in dual-class firms in general and when they need (do not need) additional external capital. In general the results show that dual-class firms have higher information asymmetry than single-class firms. When dual-class firms need additional external financing, the gap in information asymmetry between dual-class firms and single class firms is narrower. I find that as the need of additional external capital increases, the difference in information asymmetry between dual-class and single-class firms decreases (consistent with increased disclosures). It decreases, up to a point that there is no difference in information asymmetry with single-class firms that also needs additional external capital. When using adverse selection component of bid-ask spread, the paper finds that as the need of external financing gets high, dual-class firms show lower information asymmetry 1 year before they need additional external capital.

Vorheriger Artikel The extent of informational efficiency in the credit default swap market: evidence from post-earnings announcement returns

Nächster Artikel Trading activities and price discovery in foreign currency futures markets

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In response to this situation, the New York Times increased its dividend with the hope of easing shareholders’ tension (Thomas Jr 2007). In any case, it is not easy for inferior shareholders to propose changes in a dual-class structure. The decision to keep or abolish the dual-class structure itself lies in the hands of the Sulzberger’s trustee.

Dual-class firms receive higher acquisition premiums compared to single-class firms (Smart and Zutter 2003).

Examples for “on-the-job consumption” include a nice office and a corporate jet.

The labor market introduces competition from other managers, which can encourage the existing manager to perform well to maintain her reputation and to minimize the chance of being replaced. A takeover transfers a company’s control by stock purchase or exchange.

Internal control is headed by the board of directors and is put in place to achieve efficient operation, safeguard assets, and prevent errors or potential misconduct.

A bid is the price of a stock at which a dealer is willing to buy, and an ask is the price at which he or she is willing to sell. A dealer enables immediate exchange between sellers and buyers of stocks by matching buy and sell orders and holding stock inventory for any unmatched orders. The dealer sets bid-ask spreads in such a way as to reduce the risk of loss and provide a reasonable compensation for this time and risk exposure. In other words, the bid-ask spread is a cost of the transaction.

Using a matched sample (year and industry matched to single-class firms), Francis et al. (2005) show that the mean of institutional holdings in dual-class firms is 41.20 % and that 33.33 % of institutions invest in dual-class firms. Li et al. (2008) show that institutions own, on average, 34.97 % of dual-class firms’ market value of equity.

For example, the Washington Post was founded in 1877, but it was not until 1933 that Eugene Meyer (the father of Katharine Graham) bought the company. Although the Graham family did not establish the Washington Post, this family is considered to be the family founder.

This categorization of the media industry is the same as in Gompers et al. (2010).

Note the inclusions of the inverse Mills ratio (MILLS) in the equations.

The data from 1996 to 2002 are from Gompers et al. (2010) and the rest of the data are collected from the SEC’s website.

Huber-White clustered by firm is not applied in the model using the Heckman procedure.

It is possible that the manager raises external capital when information asymmetry is low (exogenously determined); in other words, the low information asymmetry is not because of increased disclosures.

Larcker and Rusticus (2010) mentioned that to control for endogeneity, at least one independent variable need to be correlated with the dependent variable from the first-stage model and at the same time not correlated with the dependent variable in the second stage model. In this paper, MEDIA industry variable is strongly correlated with DUAL (the dependent variable in the first-stage model). The strong correlation between MEDIA and DUAL has been shown in Gompers et al. (2010). However, there is no research that has shown MEDIA affects bid-ask spreads.

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Titel: Dual-class versus single-class firms: information asymmetry
verfasst von: Lucy Lim
Publikationsdatum: 01.05.2016
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 4/2016
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-014-0485-x

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