A second class allows management to extract a higher bid, and thus it serves the best interests of the shareholders.(1) This hypothesis views the dual-class recapitalization as optimal recontracting that is intended to create shareholder wealth.
Although they do not examine dual-class recapitalization, Jarrell and Poulsen (1988) find that adoption of supermajority provisions, which also give increased bargaining leverage to large blockholders of stock, leads to a small but statistically significant decrease in shareholder wealth.
It should be noted that either explanation could describe management's motivation for a dual-class recapitalization, but which explanation is the dominant one is likely to depend on organization structure.
Defensive, dual-class recapitalizations
started to occur.
Bacon, Cornett, and Davidson (1997) demonstrate that the stock price reaction to dual-class recapitalizations is related to the board's characteristics.
Davidson, III, 1997, "The Board of Directors and Dual-Class Recapitalizations," Financial Management 26, 5-22.
Managerial ownership change and firm value: Evidence from dual-class recapitalizations
and insider trading.
In a study of British dual-class firms, Ang and Megginson (1989) found that positive wealth effects were realized by shareholders after firms announced dual-class recapitalizations. Their evidence, though not entirely consistent with several other papers to be discussed later, suggested that insiders act on behalf of shareholder interests when issuing restricted voting shares.
Dual-class recapitalizations permit firms to separate control from claims to dividend income.
While the economic benefits of leveraged transactions have been studied extensively (see, for example, Jensen, 1989), there has been somewhat less investigation of equity-based restructurings, such as spin-offs, equity carve-outs, and dual-class recapitalizations. Given the increased use of equity-based restructurings recently, these latter types of transactions deserve more extensive theoretical and empirical examination.
Poulsen, 1990, "Consolidating Corporate Control: Dual-class Recapitalizations Versus Leveraged Buyouts," Journal of Financial Economics (December), 557-580.
Poulsen, "Consolidating Corporate Control: Dual-class Recapitalizations
versus Leveraged Buyouts," Journal of Financial Economics (October 1990), pp.