Corporate payouts in dual classes

2019 ◽  
Vol 45 (12) ◽  
pp. 1542-1562
Author(s):  
Adam Y.C. Lei ◽  
Huihua Li ◽  
Jin Yu
Keyword(s):  
Agency Problems ◽  
Share Repurchases ◽  
Share Repurchase ◽  
Publicly Traded ◽  
Private Benefits ◽  
Single Class ◽  
Content Type ◽  
Private Benefits Of Control ◽  
Dividend Payments ◽  
Dual Class

Purpose The purpose of this paper is to examine the dividend payments and share repurchases of dual-class firms that have both their superior voting shares and inferior voting shares publicly traded. Design/methodology/approach This paper uses matched dual-class and single-class samples from 1994 to 2015 and logit models to evaluate the likelihoods of dividend payment and share repurchase between dual-class firms and single-class firms. Findings The results show that dual-class firms are more likely than the matched sample of single-class firms to pay dividends in both share classes. Dual-class firms, however, are more likely to repurchase their superior shares than single-class firms and their inferior shares. Research limitations/implications The results suggest that dual-class firms do not use corporate payouts to either mitigate agency problems or maintain the private benefits of control. Instead, dual-class firms use dividend payments to mitigate agency problems while using repurchases of superior shares to maintain the private benefits of control, which supports the agency payout hypothesis. Practical implications This paper highlights the differences between dividend payments and share repurchases as forms of corporate payouts and suggests that firms may choose a particular form for a particular purpose. Originality/value This paper provides the first piece of empirical evidence on the corporate payouts of dual-class firms separating their superior voting shares and inferior voting shares.

What values more? Agency costs or accrual quality

2017 ◽  
Vol 15 (1) ◽  
pp. 22-38 ◽  
Author(s):  
Jagjit S. Saini ◽  
Onur Arugaslan ◽  
James DeMello
Keyword(s):  
Ownership Structure ◽  
Agency Costs ◽  
Single Class ◽  
Accrual Quality ◽  
Content Type ◽  
Earnings Response Coefficients ◽  
Earnings Informativeness ◽  
Earnings Response ◽  
Dual Class

Purpose The purpose of this paper is to examine what is weighted more by the investors when valuing a dual-class firm’s stock – greater agency costs or better accrual quality of the dual-class firm in contrast to the single-class firm. Design/methodology/approach Using the financial data of firms issuing multiple classes of stock (hereafter dual-class firms) and firms issuing single class of stock (hereafter single-class firms), the authors measure the effect of firm’s ownership structure (dual class versus single class) on the earnings response coefficients (ERCs) of prior, current and future period earnings. Findings The authors find that investors care more about agency costs than the quality of accruals in evaluating the earnings of dual-class firms. Specifically, the authors find that current annual returns of the firm are negatively associated with dual-class ownership structure and that earnings informativeness and predictability are decreasing in dual-class ownership of the firm as reflected in decreasing ERCs. Originality/value This study adds to prior literature on dual-class ownership which reports greater agency costs and better accrual quality at dual-class firms in contrast to single-class firms. This study contributes to the literature on earnings informativeness and predictability by evaluating the effect of ownership structure on the ERCs of the firm. Investors should be careful when valuing a dual-class firm and should consider agency costs in addition to accrual quality of reported earnings at such firms.

The ultimate controlling owner and corporate governance in Brazil

2019 ◽  
Vol 19 (1) ◽  
pp. 120-140 ◽  
Author(s):  
Vicente Lima Crisóstomo ◽  
Isac de Freitas Brandão
Keyword(s):  
Corporate Governance ◽  
Emerging Market ◽  
Governance System ◽  
Private Benefits ◽  
Controlling Shareholder ◽  
Content Type ◽  
Controlling Shareholders ◽  
Private Benefits Of Control ◽  
Corporate Governance System

Purpose High ownership concentration makes controlling blockholders powerful enough to use private benefits of control and able to shape the corporate governance system to favor their own interests. This paper aims to examine the effect of the nature of the ultimate firm owner on the quality of corporate governance in Brazil. Design/methodology/approach Econometric models are estimated to assess whether the nature of the ultimate controlling shareholder affects the quality of the corporate governance system. Models are estimated using panel data methodology with coefficients estimated by the generalized method of moments system estimator. Findings The results show that the absence of a controlling shareholder has a positive effect on corporate governance, whereas the presence of a controlling blockholder, or a shareholder agreement among a few large shareholders, has a negative effect. This adverse effect holds when the controlling blockholder is a family or another firm. The findings are in line with the expropriation effect given that weaker corporate governance system facilitates controlling shareholders’ ability to extract private benefits of control. The findings also give support to the substitution effect as powerful blockholders take on the management monitoring function by weakening the board. Originality value Following important previous literature, the study investigates the effect of the nature of large controlling shareholders on the adoption of good corporate governance practices. The work provides additional evidence on the effect of the nature of large controlling shareholders on the quality of the corporate governance system in Brazil, taking into account the main kinds of controlling blockholders present in that market. The findings give support to both the expropriation and substitution hypotheses highlighting the presence of the principal-principal agency model in an important emerging market, Brazil.

scholarly journals Share repurchase and dividend payout behaviour: The South African experience

2015 ◽  
Vol 46 (3) ◽  
pp. 43-54 ◽  
Author(s):  
N. Wesson ◽  
B. W. Bruwer ◽  
W. D. Hamman
Keyword(s):  
South African ◽  
Best Practice ◽  
Stock Exchange ◽  
Regulatory Environment ◽  
Share Repurchases ◽  
Share Repurchase ◽  
The South ◽  
Johannesburg Stock Exchange ◽  
Dividend Payments ◽  
African Experience

Share repurchases, rather than dividend payments, are increasingly becoming the globally favoured payout method. This has prompted a renewed interest in the field, and raises questions about the actual motivation for share repurchases and whether companies are now repurchasing shares in preference to investing in future growth. This study set out to ascertain whether South African company payout behaviour mirrors global company behaviour. Comprehensive data on share repurchases are, however, not compiled by South African financial data sources or by the Johannesburg Stock Exchange Ltd. In preparation for this study, the authors thus compiled the first comprehensive share repurchase database for companies in selected JSE-listed sectors for the first 11 years (i.e. 1999 to 2009) since share repurchases were first allowed in this country.Share repurchases were found to be a popular payout method, especially in the more recent periods covered in the study. Payout value was dominated by a few companies paying dividends every year and regularly repurchasing shares. Aspects unique to the South African regulatory environment, however, resulted in the South African share repurchase experience not fully mirroring current global practice. The main constraint in the South African share repurchase environment is that comprehensive, actual-time-based share repurchase data are not available. Recommendations are made on how to align the South African regulatory environment with global best practice. Regulatory changes, as well as continued research in the field, will equip stakeholders to make informed decisions.

Minority Shareholder Protections and the Private Benefits of Control for Swedish Mergers

2004 ◽  
Vol 39 (1) ◽  
pp. 167-191 ◽  
Author(s):  
Martin Holmén ◽  
John D. Knopf
Keyword(s):  
Tax Compliance ◽  
Limited Evidence ◽  
Private Benefits ◽  
Private Benefits Of Control ◽  
Shareholder Protection ◽  
Degree Of Separation ◽  
Using Data ◽  
Dual Class Shares ◽  
Dual Class ◽  
High Degree

AbstractSweden has a high degree of separation of ownership from control through pyramids, dual-class shares, and cross-holdings. This increases the potential for private benefits of control. However, Sweden's extralegal institutions—tax compliance and newspaper circulation—are consistent with greater shareholder protection. Using data on Swedish mergers we find limited evidence of shareholder expropriation. Apparently, Sweden's extralegal institutions offset the drawback of weak corporate governance.

Negative operating cash flows and investment inefficiency

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Chris Harris ◽  
Zhe Li
Keyword(s):  
Corporate Governance ◽  
Intangible Assets ◽  
Cash Holdings ◽  
Agency Problems ◽  
Cash Flows ◽  
Publicly Traded ◽  
Content Type ◽  
Operating Cash Flows ◽  
The Relationship ◽  
Practical Implications

PurposeThe purpose of this paper is to identify whether negative operating cash flows are related to investment inefficiency, and specifically whether they are related to subsequent overinvestment and if this relationship is driven by agency problems within the firm.Design/methodology/approachThe study conducts fixed effect regressions, testing the relationship between negative operating cash flows and the firm’s subsequent investment inefficiency. The relationship is further examined for all firms based on size, corporate governance and cash holdings – all of which are related to agency problems.FindingsThe proportion of firms reporting negative operating cash flows has been increasing over time and is positively related to subsequent investment inefficiency. This increase is explained not only by the rise in investment of intangible assets. The positive relationship is not explained by the firm size or corporate governance, but is related to cash holdings. These results are consistent across four different measures of firm investment.Practical implicationsThe percentage of publicly traded firms with negative operating cash flows has never been higher. This paper is one of the first to identify factors that may be contributing to this rise.Originality/valueThis study extends prior findings by identifying previously unexplored factors related to the rise in firms with negative operating cash flows. The rise in investment of intangible assets does not explain the increase alone. High cash holdings also influence the rise in negative operating cash flows.

Long-term performance following share repurchase, signaling costs and accounting transparency: Korean evidence

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Kyung Soon Kim ◽  
Yun W. Park
Keyword(s):  
Stock Returns ◽  
Share Repurchases ◽  
Share Repurchase ◽  
Content Type ◽  
Managerial Opportunism ◽  
History Of ◽  
Long Term Performance ◽  
Term Performance ◽  
Earnings Timeliness

Purpose Existing studies show that firms may have an incentive to use share repurchases opportunistically, thereby taking advantage of market participants’ confirmation bias that share repurchase is a signal of undervaluation. This study aims to investigate whether signaling costs and accounting transparency can serve as tools to identify opportunistic share repurchases. Design/methodology/approach The authors measure signaling costs by using two share repurchase methods (direct and indirect share repurchase) with different share repurchase costs, and measure accounting transparency using the history of earnings timeliness. The authors further measure long-term performance following share repurchases using operating performance and stock returns. Lastly, the authors compare the long-term performances between the groups defined by share repurchase method and earnings timeliness level. Findings The authors find that indirect share repurchase firms with a history of poor earnings timeliness experience unfavorable long-term performance, while other share repurchase firms do not. This finding reinforces the view that some share repurchases may be driven by managerial opportunism. In particular, when firms with a history of poor earnings-reporting behavior choose a low-cost repurchase method, their share repurchases may be motivated by managerial opportunism. Originality/value The findings suggest that past earnings timeliness and the signaling costs of a repurchase together are useful predictors of false signaling. Moreover, they suggest that investors can – at least in part – predict opportunistic share repurchases by using signaling costs and accounting transparency.

Earnings informativeness in dual-class firms

2019 ◽  
Vol 18 (3) ◽  
pp. 399-431 ◽  
Author(s):  
Olesya Lobanova ◽  
Abhijit Barua ◽  
Suchismita Mishra ◽  
Arun J. Prakash
Keyword(s):  
Empirical Support ◽  
Information Environment ◽  
Forecast Errors ◽  
Single Class ◽  
Forecast Dispersion ◽  
Content Type ◽  
Bid Ask Spread ◽  
Earnings Informativeness ◽  
Dual Class

Purpose The purpose of this study is to explain the poor informativeness of earnings in dual-class firms by examining the quality of earnings and the information environment. Design/methodology/approach The earnings informativeness, earnings quality and information environment of dual-class firms are compared with a matched sample of single-class firms. The authors have performed the returns-earnings association tests, examine the quality of earnings by using proxies for discretionary accruals, and examine the information environment by employing four empirical constructs: the analyst forecast dispersion, absolute forecast errors, Amihud’s (2002) illiquidity measure, and the bid-ask spread. Findings The results show that the quality of earnings is better while the quality of the information environment is worse in dual-class firms compared to single-class firms. Overall, the results suggest that an inferior information environment is a plausible explanation for the low informativeness of dual-class firms’ earnings. Research limitations/implications The results provide empirical support for Dechow et al. (2010) that the use of the earnings-returns association measure to draw conclusions about the quality of earnings is not appropriate in the presence of a poor information environment. Originality/value This is the first study to empirically show that low earnings informativeness in dual-class firms can be explained by the inferior quality of the information environment.

A review of the literature on dual-class firms

2019 ◽  
Vol 45 (9) ◽  
pp. 1199-1218
Author(s):  
Ashrafee Tanvir Hossain ◽  
Lawrence Kryzanowski
Keyword(s):  
Ownership Structure ◽  
Relevant Literature ◽  
Future Research ◽  
Single Class ◽  
Content Type ◽  
Managerial Entrenchment ◽  
External Monitoring ◽  
Trade Offs ◽  
Managerial Talent ◽  
Dual Class

Purpose The purpose of this paper is to critically review the relevant literature from the perspective of dual-class firms and to provide suggestions for future research on dual-class firms, and on methodological issues that should be addressed in such research. Design/methodology/approach The research design consists of three parts: an introduction to dual-class firms (motivations for; firm life cycle effects) in Part 1; concerns with firms with such share class structures (valuation; governance; accounting and corporate policy issues) in Part 2; and some solutions or ways to accommodate the trade-offs involved with such share class structures (retention arguments; index/exchange exclusions; contractual provisions; external monitoring) in Part 3. Throughout the paper, the authors provide some critiques of existing studies, particularly from a methodological perspective, the authors’ opinion on the state of the literature and suggestions for future areas of research. Findings While motivations for the use of dual-class voting structures include flexibility so that the idiosyncratic vision of their entrepreneurs/founders can be pursued in a less encumbered fashion, greater innovation and long-term managerial orientation, there are many possible costs (e.g. underinvestment and managerial entrenchment) to this ownership structure. Nevertheless, the authors believe that such firms should have provisions in place that facilitate a reversion to a single-class structure longer term when such firms have become more mature, less dependent on the idiosyncratic vision of the entrepreneurs/founders at IPO and have attracted more managerial talent. Originality/value The literature arrives at no consensus on the benefits/drawbacks of this type of share ownership structure which means that many topics of research require further academic examination. The authors provide suggested directions for such future enquiries.

Does founding family involvement affect share repurchase activity? Evidence from US firms from 2006 through 2015

2019 ◽  
Vol 45 (8) ◽  
pp. 1146-1163
Author(s):  
Shane Anthony Van Dalsem
Keyword(s):  
Family Involvement ◽  
Family Firms ◽  
Selection Process ◽  
Family Influence ◽  
Share Repurchases ◽  
Share Repurchase ◽  
Managerial Control ◽  
Content Type ◽  
Founding Family ◽  
The Usa

Purpose The purpose of this paper is to investigate whether family firms (FFs) differ from non-family firms (NFFs) in their propensity and likelihood of repurchasing shares. It focuses on the effects of voting control and managerial control of family members and economic conditions on repurchasing activity. Design/methodology/approach This paper employs pooled Tobit and probit models for a sample of 982 US firms for the period 2006 through 2015 and separates the roles of voting control and managerial control on influencing share repurchase decisions. Findings This paper provides evidence that FFs have a decreased propensity to repurchase shares relative to NFFs over the sample period. In general, the decreased propensity to repurchase shares is driven by the decision whether to repurchase shares and not the percentage of outstanding market value of equity repurchased. Practical implications For critics of share repurchases, this paper provides support for existing literature that FFs provide good long-term stewardship to their firms. In general, it demonstrates that FFs are less likely to repurchase shares than NFFs. Investors that have a preference for or against repurchases can use this information to improve their security selection process. Originality/value To date, the effects of family voting and managerial control on share repurchases in the USA has not been considered in the finance literature. This paper adds to the literature by providing evidence that family influence generally results in a lower propensity to repurchase shares.

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