Agency Conflicts, Controlling Owner Proximity, and Firm Value: An Analysis of Dual-Class Firms in the United States

Manuscript Type: Empirical Research Question/Issue: The study seeks to understand whether the proximity of the largest shareholder (controller) to the locus of management - whether the controller is a top executive, a board member, or an outsider - determines the value of US dual-class firms. Research Findings/Insights: Using a sample of 209 US dual class firms from the year 2000 and a corresponding control sample of single-class firms, we run cross-sectional regressions to determine the effect of the controller on firm value. We present robust evidence that dual-class firm value is negatively related to controller proximity. Dual-class structure overall is unrelated to firm value, because despite its negative effects with high proximity controllers there appear to be benefits when controller proximity is low (when the largest shareholder is an outsider). Theoretical/Academic Implications: Ownership structure is a widely studied subject but most studies focus on insider ownership. More nuanced aspects of ownership such as controller proximity are needed in empirical studies and theoretical models. These nuances could help us better understand the interplay between the incentive of various parties (e.g., managers, large shareholders) and the opportunity available for extraction of private benefits. Practitioner/Policy Implications: A practitioner implication is that shareholder of high-proximity dual-class firms must seek additional control mechanisms to curb agency costs. A policy implication is that investor protection (laws and institutional structure protecting shareholders) works only to a limited extent - it curbs overt acts of expropriation, but cannot eliminate acts engineered by insiders.