On the Pricing of Excess Control Rights

• In Event: Capital Markets Research IV

Abstract

We investigate the well-documented price discount applied to the shares of U.S. dual class firms as insider control rights exceed their cash flow rights. Prior literature identifies two potential channels for this discount: reduced operating performance and/or higher risk. Utilizing a residual income model framework and controlling for priced risk factors, we fail to find evidence that lower valuations are justified based on reduced operating performance. However, supporting the risk explanation, we find the discount rate applied to shares significantly increases in excess control rights. A one-standard deviation increase in excess control rights increases the cost of equity capital by approximately 40 basis points.

Authors

• Barry R Hettler, SUNY College at Brockport

• Arno Forst, University of Texas Rio Grande Valley-Brownsville

• Lindsay Baran, Kent State University