Corporate Payout Policy in Dual-Class Firms

Abstract

Using a sample of U.S. firms from 1995 to 2002, we examine corporate payout policy in dual-class firms. The expropriation hypothesis predicts that dual-class firms pay out less to shareholders because entrenched managers want to maximize the value of assets under control and the private benefits associated with it. The pre-commitment hypothesis predicts that dual-class firms pay out more to shareholders because firms use corporate payouts as a pre-commitment device to mitigate agency costs. Our results support the pre-commitment hypothesis. Dual-class firms have higher cash dividend payments and total payouts, and use more regular cash dividends rather than special dividends or repurchases, compared to single-class firms. Dual-class firms with severe free cash flow problems and few growth opportunities rely even more on corporate payouts as a pre-commitment mechanism. We also rule out the alternative hypothesis that dual-class firms pay out more because super-voting shareholders lack the ability to generate home-made dividends by selling shares since super-voting shares are non-tradable.

Keywords: dual class, voting rights, cash flow rights, dividends, payout policy

JEL Classification: G30, G32, G34, G35