The effect of voting rights on firm value

• Published date: 01 September 2021
• Author: Cristina Mabel Scherrer,Marcelo Fernandes
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/irfi.12318

LETTERS SECTION

The effect of voting rights on firm value

Cristina Mabel Scherrer

1

| Marcelo Fernandes

2

1

Norwich Business School, University of East

Anglia, Norwich, UK and CREATES

2

Sao Paulo School of Economics, FGV, Sao

Paulo, Brazil

Correspondence

Cristina Mabel Scherrer, Norwich Business

School, University of East Anglia, Norwich

Research Park, Norwich NR4 7TJ, UK.

Email: c.scherrer@uea.ac.uk

Abstract

We present a simple framework for dual-class stock shares

in which common shareholders receive public and private

cash flows (i.e., dividends and any private benefit of holding

voting rights) and preferred shareholders only receive public

cash flows. We isolate these two cash flows in order to

identify the role of voting rights on equity-holders' wealth.

In particular, using a structural cointegrated VAR model, we

find a negative relationship between the value of the voting

right and the preferred shareholders' wealth.

KEYWORDS

dual-class shares, private benefits, voting right

JEL CLASSIFICATION

G15; G32; G34; G38

1|INTRODUCTION

The value of voting rights may have similar magnitude to the value of dividend rights, especially in markets that offer

low protection to minority shareholders (Zingales, 1994). In fact, minority shareholders might get only a small frac-

tion of the verifiable income due to scarce legal protection, but a much larger share of the unverifiable income (i.e.,

private benefits of control) because competition for control protects the value of voting rights (Grossman &

Hart, 1988).

Deviations from the one-share-one-vote rule presumably indicate poorer corporate governance practices

because they induce shareholders to act in self-interest (Burkart & Lee, 2008). This leads to a negative impact on

both firm value (Gompers, Ishii, & Metrick, 2003) and operating performance (Klapper & Love, 2004). See also Adams

and Ferreira (2008) for a review.

Received: 12 November 2018 Revised: 24 January 2020 Accepted: 3 May 2020

DOI: 10.1111/irfi.12318

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which

permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no

modifications or adaptations are made.

© 2020 The Authors. International Review of Finance published by John Wiley & Sons Australia, Ltd on behalf of International

Review of Finance Ltd (2020)

1106 International Review of Finance. 2021;21:1106–1111.wileyonlinelibrary.com/journal/irfi