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Agency Problems at Dual‐Class Companies
Author(s) -
MASULIS RONALD W.,
WANG CONG,
XIE FEI
Publication year - 2009
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01477.x
Subject(s) - shareholder , insider , business , cash flow , voting , agency cost , agency (philosophy) , private benefits of control , enterprise value , accounting , control (management) , operating cash flow , sample (material) , value (mathematics) , cash management , finance , monetary economics , corporate governance , economics , law , management , philosophy , chemistry , epistemology , chromatography , machine learning , politics , political science , computer science
Using a sample of U.S. dual‐class companies, we examine how divergence between insider voting and cash flow rights affects managerial extraction of private benefits of control. We find that as this divergence widens, corporate cash holdings are worth less to outside shareholders, CEOs receive higher compensation, managers make shareholder value‐destroying acquisitions more often, and capital expenditures contribute less to shareholder value. These findings support the agency hypothesis that managers with greater excess control rights over cash flow rights are more prone to pursue private benefits at shareholders’ expense, and help explain why firm value is decreasing in insider excess control rights.