Managerial bonding and stock liquidity: An analysis of dual-class firms

Document Type

Article

Publication Date

1-1-2004

Abstract

Given the decision to create a second class of stock through a dual-class structure, we propose that management is more (less) likely to create a liquid secondary market for both classes of shares the lower (higher) its willingness to tie its personal wealth to firm performance, lf market makers recognize this relation, they should assign a higher likelihood to trades motivated by superior information in shares of firms that list both classes of stock and a lower likelihood for firms that list only one class of stock pursuant to recapitalization. Additionally, they should assign a lower likelihood to trades motivated by superior information in shares of lPOs that choose a dual-class structure and list only one class relative to IPOs that remain single-class. Our empirical tests based on IPOs and recaps between 1985 and 1988 provide support for these propositions.

Publication Source (Journal or Book title)

Journal of Economics and Finance

First Page

117

Last Page

131

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