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Dual-Class Share Essay

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Introduction Founders or controlling shareholders in corporate world intend to avoid the dilution of control that would generally accompany the public issuance of shares. Hence, as a possible solution to this dilemma, many companies practice to issue more than one share class with different voting rights. These are known as dual-class share structures and consist of two classes of common shares: superior and inferior voting shares or voting and non-voting shares. Accordingly, the mechanism of dual-class share structure allows for controlling shareholders of a firm to raise funds while preserving their controlling powers (Becht, Bolton, & Roell, 2002). Thus, it provides an effective defence against hostile takeovers and ensures the stability …show more content…

However, empirical data suggest that there is a price difference between these two classes of shares in most of the secondary markets. Hence, researchers have labelled this price discrepancy of dual class shares as voting premium (Caprio & Croci, 2008; Saito, 2003). In early 1980s, scholars have attempted to investigate why superior-voting shares command a premium in the market place over inferior-voting shares, both with single country studies (Lease, McConnell, & Mikkelson, 1983; Horner, 1988; Megginson, 1990; Rydqvist, 1996; Hoffmann, 1999; Linciano, 2002; Neumann, 2003) and with cross-countries analyses (Nenova, 2003). It is revealed that size of voting premium substantially varies among their studies and the size of the premium has led some researchers to doubt about the rationality of market …show more content…

Hence, it is evident that there is no rational mechanism for pricing the dual class shares; a curiosity emerges among researchers on how to maintain relativity of valuation in two classes of shares in Sri Lanka. However, there is still no clear answer to the question of what determines the premium in Sri Lanka. As many factors may govern this price difference, this study attempts to investigate all the determinants which could explain the price discrepancy of dual class shares in Sri Lankan companies on the empirical

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