We study the effects of a regulatory change that induced the unification of most dual class shares in Israel in the 1990s. Specifically, we follow the evolution of ownership structure in a sample of 80 companies that unified their dual-class shares, and compare it with a control sample of firms that maintained their dual share structure at least until 2000. Our main findings are as follows. First, controlling shareholders offset the dilution of voting rights they incurred upon unification by: 1) increasing their holdings prior to the unification (ex-ante preparation), and 2) by buying shares afterwards; by the end of the sample period their voting power was only marginally lower than in the control sample. This offsetting result suggests that marginal voting rights may be important to controlling shareholders even beyond the 50% threshold. Second, share unifications were not associated with much change in the identity of controlling shareholders. Third, the proportion of firms affiliated with pyramidal business groups in the sample of unifying firms was lower than in the population of listed firms as a whole and not different from that in the control sample, suggesting that pyramidal ownership structures did not replace dual class shares. Finally, unifying firms did not exhibit a substantial improvement in their performance and valuation in comparison with the control sample.
Bibliographical noteFunding Information:
We thank the Editors of the Journal of Corporate Finance, as well as Morten Bennedsen, Sudipto Bhattacharya, Ingolf Dittmann, Joseph Fan, Shmuel Hauser, seminar participants at IDC, and conference participants at the Workshop on Corporate Governance at the Copenhagen Business School, the Conference in Honor of Haim Levy at the Hebrew University, the CEPR/Banca d'Italia conference in Rome, the European Finance Association meeting in Frankfurt, and the Journal of Corporate Finance conference in Beijing for the many helpful comments and suggestions. We also thank Konstantin (Kosta) Kosenko for sharing with us his data on pyramidal groups in Israel, and Yevgeni Ostrovsky and Gill Segal for the outstanding research assistance. Financial support from the Krueger Center at the Hebrew University School of Business Administration is gratefully acknowledged. All remaining errors are our own.
- Corporate governance
- Dual class shares