The Relevance of Tag along Rights and Identity of Controlling Shareholders for the Price Spreads between Dual-Class Shares: the Brazilian Case

Abstract

This paper analyzes the determinants of the differential pricing of equity classes (the so-called dual-class premium [DCP]) in Brazil from 1995 to 2006 with a focus on two specific corporate governance aspects: i) the granting of tag along rights, a mandatory bid rule that extends to minority shareholders the right to sell their shares in case of a control transfer; and ii) the identity of the controlling shareholders, with an emphasis on family control. We examined 87 Brazilian listed firms throughout the period, resulting in a sample of 3,287 observations. We found empirical evidence that changes in Corporate Law decreased (increased) the advantage of voting shares in terms of tag along rights reduced (incremented) DCP. However, we did not find empirical evidence that the voluntary granting of tag along rights altered DCP. We also found evidence suggesting that family control is positively associated with DCP level. Overall, our results indicate that regulations regarding shareholders’ rights and the identity of controlling shareholders are the two relevant corporate governance variables for DCP level in environments characterized by concentrated ownership structures.

Keywords

• voting and non-voting shares
• dual class premium
• private benefits of control
• legal rules
• mandatory bid Rule.