Frontiers in Business, Economics and Management
ISSN: 2766-824X | Vol. 14, No. 2, 2024
69
Research on Changes in the Value of Dual‐Class Share
Companies Over the Life Cycle
Chengling Mao
Management School, Lancaster University, Lancashire, UK
Abstract: This paper adopts a quantitative research approach by using Tobin's q value to measure the value of a firm.
Simultaneously, using OLS regression analysis, in which Tobin's Q is used as the dependent variable and financial performance,
perpetual type, industry, and time as independent variables, to explore the factors that influence firm valuation. Research shows
that organizations with sunset provisions are worth much more in the third year of their life cycle than those without them, which
supports the call for sunset clauses to some extent.
Keywords: Corporate Governance, Firm Valuation, Dual-class Share Regime, Sunset Clauses, Agency Costs, Business Life
Cycle, Tobin's Q.
1. Introduction
This study aims to explore the issue of how the value of
dual-class firms develops over their life cycle and whether
sunset clauses dual-class companies are consistently more
valuable than perpetual dual-class companies throughout
their life span, based on life cycle, agency costs, and other
theories. Dual-class share structures have long been a topic of
intense debate on a worldwide scale. In recent years, the dual-
class share structure has grown in popularity among US
businessmen and entrepreneurs as it can provide the
company’s founders with more control and its unequal voting
rights enable the founders to exert greater influence over the
operations and future strategic direction of the company after
they become public (Dunkley, 2019). The dual-class system
has many advantages, such as dual-class companies tend to
be valued at IPO at a higher level than one-share companies,
but this valuation premium decreases over time (Cremers et
al., 2018). This is due to the dual-class system also having
some disadvantages, such as the prominence of agency
problems, the potential for abuse by incompetent managers,
and higher borrowing costs (Aggarwal et al., 2022;
Chemmanur and Jiao, 2012; Lee et al., 2022). Research has
shown that dual-class enterprises lose value as they progress
through the life span because they exhibit lower operating
profits, lower creativity, and lower worker productivity than
one-share one vote companies (Lin et al., 2022).
In order to maintain their competitive advantage, business
owners of contemporary technological companies seek to
more effectively implement dual-class share structures
(Condon, 2018). In this context, it has been suggested that
sunset clauses can be applied to dual-class companies. The
sunset clause is a provision that limits the duration of the
activity, and it forces a statute to expire on the date specified,
unless the legislature extends it (Kouroutakis, 2016). The
existence of a sunset clause converts a company's dual-class
share regime into a single-class share regime after a given
amount of time has passed or after the occurrence of certain
events. Such provisions are considered to be effective in
solving agency issues, providing incentives to the company's
managers, and promoting long-term value addition to the
company (Weng and Hu, 2022).
The dual-class share system is a relatively new policy that
has not been in place for a long time in many countries, such
as China and the UK (Sun et al., 2020). Therefore, there is a
large theoretical gap in the applicability of their regulations
and regimes. For example, dual-class joint stock companies
were not permitted to list in China until 2018, which resulted
in those utilizing this structure only being listed outside of
China, leading China to lose out on a number of outstanding
high-tech firms (Sun et al., 2020). Additionally, there is a lack
of many UK technology firms that went public on the London
Stock Exchange (LSE), and there is a lack of cutting-edge
technology businesses such as Google (Reddy, 2020). The
UK Government considers the promotion of UK innovative
firms’ IPO as a vital policy because the Government is
worried about British high-tech corporations being taken over
by overseas acquirers (Reddy, 2020). Therefore, exploring
this field can assist enterprises to increase their understanding
of the underlying theory of dual-class share structures and
apply the resulting related systems, such as sunset clauses.
This will enable enterprises to take advantage of the system
for long-term growth and minimise the governance
deficiencies that may occur as a result. In addition, this study
can better assist local governments andinstitutions to
introduce dual-class listing provisions, suitable for their own
countries, to enrich the depth and breadth of capital markets.
This paper adopts a quantitative research approach. Over
1,000 secondary data have been collected from the WRDS
database for a total of 123 companies, including basic
financial data and industry indicators. The paper uses the
value of Tobin's q to measure the worth of the company.
Tobin’s Q is an indicator which is often used in corporate
governance to evaluate the business performance of firms,
and “Q is the ratio of the market value of the existing shares
(share capital) to the replacement cost of the total physical
assets” (Ishaq et al., 2021, p. 426). In this paper’s research
analysis, Tobin's Q value was calculated for each company
using the data collected on total assets, the book
value of the common stock, and the market value of the
common stock. Tobin’sQ value was then grouped by year and
a line graph was created whereby the trend in the median
value of corporate Tobin’s Q over the years can be seen in a
clear format. This study found that the value of a dual-class
joint stock company decreases as the company matures.
Moreover, dual-class companies with sunset clauses are
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consistently more valuable than perpetual dual-class
companies in the first four years after listing. Five OLS
(Ordinary Least Square) regression models were used with a
total of ten independent variables, to further investigate the
factors that could have contributed to changes in the value of
dual-class corporations over the course of the four years after
their listing. The research found that many of the independent
variables showed a significant correlation with the value of
Tobin's Q within four years of the company's listing, such as
the amount of cash and short-term investments held by the
firm and the amount of R&D investment. However, the
variable of whether the firm has a perpetual dual-class share
structure shows significance only in the third year with the
value of the firm's Tobin's Q. This means that sunset clause
dual-class companies are significantly more valuable in their
third year after listing than permanent dual-class companies.
Due to the limitations of the sample year, this research was
unable to collect sufficient data on companies with sunset
clauses five years after listing. However, Jackson Jr’s (2018)
research has shown that the difference in valuation between
sunset provision dual-class companies and perpetual dual-
class companies begins to emerge between the third and sixth
year and becomes significant after the seventh year. Therefore,
this paper proposes that the study of the value change of dual-
class joint stock companies over a longer post-IPO horizon
may be a topic for future academic research.
This thesis follows the empirical and research framework
of Jackson Jr (2018), where I have retained the same
independent and dependent variables but selected data from
different years and different companies, thus also yielding
divergent findings. Contradictions are the beginning of new
discoveries, and therefore this paper also encourages further
academic research into the area of dual-class share regimes.
2. Literature Review
The dual-class system has grown to be one of the most
contentious topics in current financial markets and corporate
governance discussion, as evidenced by the increasing
number of stock exchanges that are beginning to allow dual-
tracked companies to list (e.g., Singapore Exchange (SGX)
and Shenzhen Stock Exchange (SZSE)) and the US Council
of Institutional Investors requires a reasonable time-based
sunset provision for dual-class companies listed on US stock
exchanges (Gurrea-Martínez, 2021).
A dual share system is a type of share structure that allows
a company to issue multiple classes of shares, at least one of
which has disproportionately greater voting power in
comparison to cash flow or equity rights (Reddy, 2021). Such
stock, with numerous voting rights per share, is typically
owned by the company's founders and management, which
allows them to retain their primary control rights of the
company when it goes public (Gurrea-Martínez, 2021).
Dual-class share systems in initial public offerings are
becoming more and more popular as a means of protecting
founders against intervention or dismissal by common
shareholders (Winden, 2018). Due to the information
asymmetry, external shareholders do not fully comprehend
what entrepreneurs are doing for companies and how they
will affect the future, thus they are primarily concerned with
short-term revenue growth, which will force executives to
pursue higher profit margins in the near term (Cao et al.,
2020). However, the use of the dual-class corporate structure
may effectively resolve this problem. Superior voting rights
shield founders from short-term market pressures and enable
them to use their unique abilities, such as operational and
management skills, to pursue the long-term development and
vision of the business and preserve its competitive edge
(Schoen and Hallam, 2019). For instance, Mark Zuckerberg,
the co- founder and CEO of Facebook, successfully
negotiated the purchase of Instagram for $1 billion via
separate discussions in 2012 without consulting stockholders
or board members (Bangert et al., 2021). Such action initially
attracted a great deal of criticism, and without the protection
of the dual-class share regime, for which Zuckerberg could
have been held accountable by the board, the acquisition may
not have gone ahead, yet today Instagram has a market value
of over $100 billion (Sharfman,2019). This advantage could
also attract an increased number of family entrepreneurs who
are more concerned with maintaining family operations and
control than short-term earnings; without a dual-class share
system, such companies may turn to private funding rather
than go public (Burson and Jensen, 2021). Therefore, the
existence of a dual-class share regime expands the depth and
scope of the capital markets and satisfies the demands of a
larger spectrum of investors (Bangert et al., 2021).
In addition, due to the high cost, risk, and complexity of the
technology industry, a dual ownership structure is widely
used in high-tech companies (Cao et al., 2020). A dual share
structure can fulfil the company's financial demands and
assist entrepreneurs to maintain their independence and focus
on significant innovations, which will help the firm stay stable
and thrive over the long term (Wu, 2021). For young
companies, the dual-class system is positively correlated with
innovation (Atanassov et al., 2016). Additionally, the
likelihood of acquisition is lower for dual-class stock
enterprises (Jordan et al., 2016). This is due to the fact that the
company's founders and key management own a majority of
the voting rights, causing difficulty for an acquirer to
purchase the firm by acquiring outstanding shares in the open
market. Furthermore, research has shown that a dual-class
sharing structure may increase the accuracy of financial
reporting since insiders are less subjected to shareholder
pressure and control and are therefore less likely to hide
financial information (Forst et al., 2019).
The dual-class shareholding structure provides many
advantages, but it also has noticeable drawbacks that must be
considered. To utilise dual-class structures to their full extent,
we must view them from a holistic and dialectical perspective.
Firstly, agency costs can be substantial when a dual-class
structure is used. This is because executives have additional
voting rights but usually only have to shoulder a fraction of
the financial impact of their choices, whilst maintaining the
capacity to thwart acquisitions and consolidate themselves
(Aggarwal et al., 2022). Moreover, the significant degree of
disparity between ownership and control may be detrimental
to the value of the company, the likelihood of a successful
issue, and the long-term growth of the firm after the issue
(Cumming et al., 2019). Furthermore, serious agency
problems and opaque companies will increase the risk of
share price collapse (Hong et al., 2017). Secondly, research
has shown that the innovation capacity of dual-class
businesses declines with time and the favourable correlation
between dual-class structure and company technology
innovation is only present for the first 10 years after IPO, with
little advantage remaining beyond that (Baran et al., 2019).
Thirdly, executives with too much control may be inclined to
appoint relatives to key positions rather than select more
suitable candidates from outside (Schoen and Hallam, 2019).
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Entrepreneurs may also act in their personal interests rather
than those of shareholders due to a lack of regulation, such as
related party transactions, and the special skills of governance
possessed by controllers may diminish over time (Schoen and
Hallam, 2019). Furthermore, the dual-class share system may
also be abused by incompetent or unskilled operators to
reduce or damage the value of the company (Chemmanur and
Jiao, 2012). Fourthly, research has indicated that the use of a
dual-class structure may also exacerbate over-investment,
resulting in the misuse of the company's financial resources
and lowering the effectiveness of the company's investments
(Beladi et al., 2022). Fifthly, lending institutions may use
superior information to put pressure on dual-class companies
that are highly dependent on banks, making it more expensive
to borrow money throughout the middle periods of their life
spans, compared to single- class ownership businesses (Lee
et al., 2022). Sixthly, if small and medium-sized
shareholders with minority voting rights do not have their
interests effectively protected in the company’s dual-class
share regime, they may choose not to invest and thus give up
the whole capital market (Martínez, 2018). This would be
detrimental not only to the company's founders, who would
find it more difficult to raise money in the future but also to
regulators such as stock exchanges, whose reputation and
independence would be impaired (Martínez, 2018).
Over the last several years, dual-class share regimes have
become more widely accepted, and the debate around them
has also intensified. There is currently no consensus regarding
the effect of dual-class share systems on business
performance and whether sunset provisions should be
mandatory. However, it is undeniable that the shortcomings
of the system can be mitigated or even eliminated by a number
of measures and instruments to make it more suitable for
entrepreneurs and small and medium-sized shareholders. For
example, a study has suggested that institutional investors
with large shareholdings can exert control over executives so
that they do not cut back on R&D to meet short-term
objectives and encourage businesses to move towards value
maximisation (Bushee, 1998). In addition, various academics
have proposed that firms should be obliged to implement
time-based sunset clauses in order to solve the governance
inefficiencies that are linked to a perpetual dual-class
structure and to safeguard the interests of their public
shareholders (Bebchuk and Kastiel, 2017). Sunset provisions
provide for the automatic conversion of some or all of the
higher voting shares to lower voting shares upon the
occurrence of certain events; there are several common types
of sunset clauses: Dilution sunset, Transfer sunset,
Triggering-event sunset, and Time-based sunset (Li, 2022). A
dilution sunset occurs when the number of high-voting shares
falls below a certain proportion of the total number of shares,
resulting in the conversion of special voting shares into
normal voting shares (Winden, 2018). The transfer sunset
occurs when the non-founder shareholder acquires the
particular voting shares from the creators, resulting in the
transferred particular voting shares changing to ordinary
shares (Li, 2022). Triggering-event sunset is the conversion
of shares with special voting rights into ordinary shares when
a specific event occurs, such as the founder's disability, death,
or retirement (Bebchuk and Kastiel, 2017). Time- based
sunset is the automated conversion of special voting shares
into common voting shares after a given period of years has
elapsed since the original public sale of the ordinary voting
share (Winden, 2018). These sunset provisions not only help
business owners preserve a dual-class structure over time as
they seek innovation and vision, but they also lessen the
possibility of value decrease as a result of ineffective internal
decision-making and control (Fisch and Solomon, 2019).
Research has shown that institutional investors favour dual-
class share companies with sunset clauses as they perceive a
greater risk of unsatisfactory governance and financial
performance for permanent dual-class companies (Burson
and Jensen, 2021). Baran et al. (2019) also suggest that, as a
company evolves, the disadvantages caused by value-
damaging agency costs tend to outweigh the advantages
offered by value-based innovation, and therefore unequal
voting rights should be phased out. A study revealed that firm
innovation is related to the life cycle of a company. For
instance, when a company is young and has a dual-class share
system, it is more likely to be innovative than when it is more
mature and less transparent (Atanassov et al., 2016). In
addition, the core management of a dual-class joint stock
corporation may also maintain control and prevent the
unification of stocks by selling low-voting shares and holding
onto high- voting shares (Sharfman,2019). All of the
aforementioned arguments illustrate the need to introduce a
sunset clause.
3. Methodology
3.1. Research Method
This paper adopts a quantitative method. Quantitative
methods are commonly used to analyse and interpret the data
collected from various sources, such as surveys, research,
questionnaires and secondary data after pre-processing by
computer. The goal of quantitative research is to explain
particular events or generalise findings across groups of
people by gathering numerical data (Satinem, 2016). In
contrast to qualitative research, which presents theories or
hypotheses, quantitative research focuses more on testing
theories and hypotheses mathematically and statistically,
requiring a larger sample size, collecting and analysing
information from an objective perspective, and typically
presents its findings in the form of graphs and figures
(Streefkerk, 2019). A quantitative technique is thus more
suitable for this research since it is intended to explore how
the value of dual-class share corporates with and without
sunset clauses and how evolves over time.
Secondary data collection was the primary form of data
gathering employed in this study. Secondary analysis is
defined as “a research strategy, which makes use of pre-
existing quantitative data or pre-existing qualitative research
data for the purposes of investing new questions or verifying
previous studies” (Heaton, 2004, p. 16). The feasibility of
using current data for studies is becoming increasingly
common in an era where enormous volumes of data are being
gathered and preserved by scholars across the globe (Johnston,
2017). The advantage of secondary analysis is that it is very
cost- effective, as the availability of existing data means that
researchers do not need to invest a lot of time and effort in
processing and calculating the raw data, but can instead make
direct use of large, high-quality datasets (Johnston, 2017).
This not only broadens the depth and breadth of the sample
study but also helps to enhance the researcher's research
capabilities to a large extent (Johnston, 2017), and “the
quality and breadth of large datasets are often beyond the
reach of individual researchers” (Cole and Trinh, 2017, p.
354). Furthermore, secondary data analysis can also assist in
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improving quality assurance by validating the primary study,
thereby increasing the openness, credibility, and
dependability of research results (Andrews et al., 2012). In
this study, by using the WRDS database, financial data and
ROA ratios were able to be obtained for over 100 companies
directly, rather than having to search through each company's
annual report by year to find the pertinent data and calculate
it. This greatly reduced the time I had to spend collecting and
analysing the data, as well as the likelihood of human error.
However, the use of secondary data also has several
drawbacks. For instance, since the secondary investigator was
not engaged in the data gathering process, they are unaware
of the details of how it was carried out, the effectiveness of
the data collection, and whether the presence of some issues
influenced the data (Johnston, 2017). Furthermore, since pre-
collected and processed data was not intended to address a
particular research issue, such statistics may be missing
important information and frequently need to be processed
further before being utilized in quantitative analysis (Cole and
Trinh, 2017). Moreover, when utilising secondary data, it is
also important to pay attention to missing data and consider
the sample size, appropriateness, and chronology (Doolan and
Froelicher, 2009). In this study, I have marked missing
research and development expenses and fixed asset items as
zero and marked the lacking ROA data as directly missing.
Regardless of the volume of missing data within the WRDS
database, it nevertheless had an impact on the regression
analysis’s findings.
3.2. Philosophical Stance
As the basis for the quantitative approach, this paper is
guided by positivism as the main philosophy. Science is a
field of study that emphasizes empirical investigation, where
all phenomena reflect empirical indicators that describe
reality (Sale et al., 2002). The quantitative research method
employs the ontological stance that there is only one single
objective reality and that it is independent of human
experience (Sale et al., 2002). This means that facts are not
altered by the research process, and researchers cannot be
affected. Hence, observations were taken from an objective
perspective and worked for their intrinsic value and meaning.
In addition, positivism also derives from assumptions, which
are presented as facts or claims with the presumption that they
will hold up to scrutiny. They are also presented as basic facts
or principles that form the foundation of or provide the
impetus for other ideas. For example, if perpetual dual-class
companies are worth less than sunset dual-class companies
over their entire life cycle, then we can encourage more
aggressive application and factual sunset clauses for dual-
class companies. This will reduce the risk and uncertainty
associated with dual-class share regimes and help increase the
long-term value of the business.
I have developed the following hypothesis in accordance
with the thesis' central ideas and research directions:
H1: The value of companies with a sunset clause is higher
than companies without a sunset clause.
3.3. Data Collection and Research Process
Firstly, a list from the Council of Institutional Investors
(2022) of all US-registered companies with a market
capitalization of at least US$200 million and unequal voting
rights between 2010 and 2020 was collected. Secondly, the
identification of all companies with time-based sunsets from
2010 to 2020 from another list named Companies with Time-
Based Sunsets On Dual-Class Stock, provided by the Council
of Institutional Investors (2022). Thirdly, the two samples
were matched and identified 40 dual-class companies with
sunset clauses and 105 permanent dual-class companies
between 2010-2020. Fourthly, the identified samples were
matched with accounting data from the ‘Compustat’ database
and excluded data for companies acquired within 5 years of
going public as the acquisition event would have changed the
capital structure of the company, resulting in a final sample of
87 permanent dual-class companies and 36 dual-class
companies with sunset clauses.
Perpetual dual-class businesses and dual-class firms with
sunset provisions were the two types of coded firms in the
sample, and they each served as a comparison control group
for the other. After the dual-class corporation converted to one
share one vote due to a sunset provision, the data was
categorised as missing for the following years and it was
subsequently omitted from the dual-class analysis.
After determining the final sample, the data was then
collected from the WRDS database on the sample companies'
shares outstanding (CSHO), annual closing price (PRCC_F),
common stock/common equity (CEQ) and total assets (AT)
data. I then calculated Tobin's Q for the sample companies for
each of the four years following the IPO based on Tobin's Q's
defined formula "the book value of assets (at) plus the market
value of common shares (prcc_f × csho) minus the book value
of common shares (ceq), all measured by the book value of
assets (at)" (Ghaly et al., 2015, p. 57). Tobin’s q, developed
by Nobel Prize-winning economist James Tobin, is defined as
the market value of a corporation divided by the replacement
cost of its assets, which is a tool for determining if a given
firm or industry is overpriced or underpriced, where the q-
ratio indicates the link between market value and inherent
worth (Hayes, 2021). Within this study, Tobin’sQ is used to
measure the value of the business. After determining Tobin's
Q values for the firms, they were listed in the order of IPO
year, the first year, second year, third year and fourth year. I
then calculated the median Tobin's Q for each year for all
permanent dual-class firms and sunset clause dual-class firms
in the sample separately, and finally, a line graph was used to
display their trend.
Moreover, variables were investigated that might impact
the change in a firm's Tobin's Q value with the use of the SPSS
program. The value of dual-class IPO enterprises was
examined using four OLS (Ordinary Least Square) regression
models over a four-year period, including the year of the IPO,
the first year following the IPO, the second year following the
IPO, the third year following the IPO, and the fourth year
following the IPO. Regression is a popular statistical
approach for determining connections between data (Huarng
andYu, 2015). To investigate the strength of the relationship
between the independent and dependent variables, regression
analysis maybe used (Lo et al., 2020). One of the most
common methods of performing a regression analysis is linear
regression, which has three main objectives, they are to
comprehend the relationship between the dependent and
independent variables, to determine whether the independent
variable has an effect on the dependent variable and to
forecast the value of another variable, based on the identified
variable (Permai and Tanty, 2018). For linear regression
models, the most used estimate approach is Ordinary Least
Squares (Frost, 2018).
The specific meanings of the dependent variables included
in the regression analysis are as follows:
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The variable R&D, which is defined by research and
development expenditure divided by total assets and is a
useful indicator of a company's investment in innovation, and
patents that are produced will be added to the intangible assets
account and finally reported in the annual report. R&D
expenditure can therefore be used to measure whether a dual-
class share company is continuing to innovate and advance its
mission as a way to achieve value growth after its IPO.
The variable Leverage, which is defined by total liabilities
divided by total assets, is used to measure the capital structure
of a business. Leverage can be divided into financial and
operational leverage, which amplifies the profit or cash flow
of a business by increasing its debt financing and fixed costs
respectively, but which also usually exposes the business to
an equal volume of risk (CFI Team, 2022c). A focus on
leverage can help to better explore whether a firm's capital
structure can have an impact on the value of the firm.
The variable PPE (Property, Plant, and Equipment) is
defined by total fixed assets divided by total assets. PPE, also
known as fixed assets, is a tangible, long-term asset that is
important to a company's day-to-day operations and will
provide long-term economic advantages and income to the
company; increased investment in PPE is a positive sign that
executives are confident in the future development and
profitability of their company over the long-term (Murphy,
2022). Paying attention to PPE is to explore whether a firm's
fixed asset holdings have an impact on the value of the firm.
The variable Size is defined by the natural log of total assets
in this research. The total assets shown on the company's
balance sheet are the sum of all of its current and long- term
assets. Investigating whether the size of a firm's assets
influences the value of the business is the goal of a focus on
total assets.
The variable Cash is defined by cash and short-term
investment divided by total assets. Cash is a vital liquid asset
used in the daily operations of a business. Short-term
investments here are not held by the business for investment
purposes and are therefore highly liquid and can be regarded
as a cash equivalent. By focusing on cash and short-term
investments, we can determine if these assets have an
influence on the value of the business.
The variable CapEx is defined by capital expenditures
divided by total assets. Capital expenditure is a type of
investment that a company makes to buy long-term assets
such as property and equipment, which is vital for a firm to
sustain and expand its business (CFI Team, 2022a).
Regression analyses for this experiment also explore the
impact of corporate capital expenditure on firm value.
ROA (Return on Assets), which is defined by net income
divided by average assets, is often used to assess the
relationship between a company’s profitability and total
assets, and it reflects the company’s financial performance;
the greater the return, the more effectively the organisation is
using its financial resources (CFI Team, 2022b). The ROA
values used in the regression are all sourced directly from the
WRDS database, rather than being calculated.
3.4. Validity and Reliability
The raw data in this paper were obtained from the
authoritative WRDS database. Tobin’s q values were also
calculated according to a standard formula, and the results
were tested and examined multiple times to ensure high
finding accuracy. In addition, two versions of the OLS
regression analysis were conducted; the first included
industry and year-specifics, and the second included neither,
to explore more fully the relationship between specific
variables and firm value. This study includes almost entirely
dual-class share companies listed between 2010 and 2020 and
therefore has a large sample size. Therefore, the results of this
study can be viewed as reliable and valid.
3.5. Ethical Considerations
The issue of ethics in academic research is critical. In
academic research, researchers are expected to have high
ethical standards and refrain from misconduct behaviour such
as fraud and falsification which include copying the work of
others and misrepresenting research data; such actions not
only harm the reputation of academic researchers but may
also expose them to legal penalties (Nurunnabi and Hossain,
2019). In order to guarantee the completeness and
effectiveness of the research, it is crucial to recognise that the
purpose of the study is to enrich communal knowledge, rather
than to support expected results (Elsevier Author Services,
n.d.). This study follows strictly the ethical guidelines of
academia. There is no plagiarism in the work of others and
the literature cited is listed according to the rules provided by
Lancaster University. There was also no falsification or
fabrication of experimental data, and all experimental data
were generated in a natural way, which is reasonable and
traceable and there is no personal bias. Furthermore, there
was no manipulation of the experimental procedures in this
study to achieve the desired results.
There are also various ethical issues that need to be
considered in the use of secondary data. Data which is often
readily accessible via the internet, books, or another medium
allows for further research and evaluation, provided that
ownership of the source data is recognised (Tripathy, 2013).
All the data for this study was sourced from the WRDS
(Wharton Research Data Services) database, which has a vast
collection of historical data on various financial, management,
and marketing industries and its web-based portal allows
users to easily access the data (Hall, 2015). Hence, I was
required to follow the WRDS database guidelines and terms
regarding the use of the data. For example, subscribers are not
permitted to use the data collected from the WRDS database
for commercial or non-academic purposes (Wharton
Research Data Services, 2020). This database is protected by
U.S. domestic and global legislation and agreements, and it
contains copyrighted content, trademarks, and other exclusive
information that belongs to WRDS, its suppliers and other
parties (Wharton Research Data Services, 2020). Users are
not permitted to utilise patented technology materials without
prior written permission, with the exception of what is
specified in the Subscription Agreement’s terms (Wharton
Research Data Services, 2020). This paper's entire research
and data gathering process was conducted in a way that
complied with all applicable laws and regulations.
4. Findings and Evaluation of the
Findings
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Table 1. Sample companies
IPO Year Dual-Class IPOs Sunets Perpetual %Perpetual
2010 6 1 5 83%
2011 4 1 3 75%
2012 7 2 5 71%
2013 9 1 8 89%
2014 11 1 10 91%
2015 15 2 13 87%
2016 6 2 4 67%
2017 19 5 14 74%
2018 12 6 6 50%
2019 18 7 11 61%
2020 16 8 8 50%
Total 123 36 87 71%
Table 2. Valuation of Dual-Class Firm
Median Tobin's Q of companies at different stages
following the IPO year. Tobin’s Q equals the market value of
ordinary equity, plus the book value of assets (AT), minus the
book value of ordinary equity (CEQ), all divided by the book
value of assets.
Tobin's Q: The market value of ordinary equity (CSHO ∗
PRCC_F), plus book value of assets (AT), minus the book
value of ordinary equity (CEQ), all divided by the book value
of assets (AT).
Perpetual is an indicator variable that all permanent dual-
class companies are marked as 1 and all sunset clauses dual-
class companies are marked as 0.
Size is the natural log of total assets.
Leverage: Current Liabilities (DLC), plus Long-Term Debt
(DLTT), all divided by total assets (AT).
PPE: Property, Plant and Equipment (PPEGT), divided by
total assets (AT).
Cash: Cash and Short-term Investment (CHE), divided by
total assets (AT).
R&D: Research and Development Expense (XRD),
divided by total assets (AT).
CapEx: Capital Expenditures (CAPX), divided by total
assets (AT).
ROA data is exported directly from the WRDS database.
The industry is defined by a two-digit SIC level. The four-
digit SIC can be exported
directly from the WRDS database and then extracted the
first two digits for regression analysis.
For year effects, companies listed in 2010 are marked as 0,
those listed in 2011 are marked as 1, those listed in 2012 are
marked as 2, and so on.
The robust standard errors' P-values are in parentheses, and
the symbols * and ** denote statistical significance at the 5%
and 1% levels, respectively.
75
Table 3. OLS regression analysis results
Table 1 lists the overall number of dual-class initial public
offerings (IPOs) in the sample by year, as well as the number
of IPOs with sunset clauses, the number of permanent-type
IPOs, and the proportion of permanent-type IPOs to total IPO
dual- class offerings. According to statistics, 71% of the
companies in the sample are of the permanent type from 2010
to 2020. These samples weren't purposefully chosen; rather,
they were created naturally via matching and reasonable
filtering (dual-class companies acquired within 5 years of
listing were excluded from the sample due to changes in the
capital structure).
This paper adheres to the empirical approach developed by
Jackson Jr (2018) by focusing on the examination of probable
life-cycle variations between perpetual and sunset clause type
dual-class PLCs and using Tobin's Q to evaluate standardized
business value. Table 1 displays the median Tobin's Q value
for permanent dual-class enterprises and sunset clause dual-
class enterprises at different points in their post-IPO life
cycles. According to the median corporate Tobin's q, the
valuation of dual-class stock companies with sunset clauses is
highest in the year of the first public offering (IPO), and then
there is a resulting significant decrease from 6.04 to 3.38 in
the three years following the IPO. In the year of listing and
the following four years, their valuations were significantly
higher than those of perpetual dual-class companies. For
permanent dual-class share corporations, the values are
comparable in the zero and second years, with an insignificant
rise in the first year, but they also decline throughout the
progress of the company's lifetime. For all dual-class share
corporations, there is a more pronounced decline in value
from 3.20 to 2.59 during the first year after listing, a small
fluctuation between one and three years after listing, and a
continuation of the decline between the third and fourth years.
In the fourth year after listing, the median Tobin's Q was 3.69
for sunset dual-class companies, 1.73 for permanent dual-
class companies, and 2.06 for all dual-class companies,
implying a valuation discount of approximately 38.9% for
sunset dual-class companies, 16.8% for permanent dual-class
companies, and 35.6% for all dual-class companies. These
statistics, however, do not consider potential changes in
valuation attributed to company-level, industry, and temporal
factors. This is partly consistent with the findings of Cremers
et al. (2018), which revealed that dual-class corporate values
are higher during the IPO year but tend to decline as the firm
matures. However, this research's findings diverge somewhat
from those of Jackson Jr. (2018), who discovered that at the
time of their initial public offerings, perpetual dual-class
businesses are valued much higher than sunset dual-class
businesses, however, as the companies mature, the difference
between their valuations gradually closes, and by the third and
fourth years of their life cycles, sunset provision dual-class
corporations begin to outperform perpetual dual-class
corporations and more significantly in the seventh year of
their life cycle. Currently, the reasons for this discrepancy are
not yet clear.
The paper aimed further explore the above factors that
affect a firm’s valuation such as perpetual, assets, ROA,
industry, and time. According to the results of the OLS
regression analysis (see table 3), there is a continuous and
more significant effect of firm cash holdings on the valuation
of firms. This indicates that a rise in a company's cash and
short-term investments may, to some degree, boost the value
of the company between the four years after its listing.
Moreover, a company's R&D expenditure shows significance
in the fourth year of the life cycle in relation to the valuation
of the company. This may be attributable to the fact that the
rapid growth in sales during the growth phase of the life cycle
allows companies to invest more in research and development
76
to support sustainability and increase the value of their
businesses. Additionally, factors such as whether the firm is a
perpetual dual-class firm and the industry in which the firm
operates also show significance in relation to the firm's
valuation in a given year. The findings of this regression are
also strongly influenced by the year factor. On the other hand,
the company's return on assets (ROA),the volume of its total
assets, its capital structure, and its capital expenditures, do not
seem to have an effect on the value of the business in the four
years after the IPO.
In the third year after listing, the value of firms with sunset
provisions was approximately 2.66 higher than the worth of
companies in the permanent dual category. The third year of
the regression analysis model shows that this association is
statistically significant at the 5% level. However, the
perpetual indicator did not demonstrate a significant
correlation with the value of Tobin's Q in the fourth year,
which may have been caused by a small sample size or a
particular industry, among other factors. Research has shown
that the values of businesses with sunset provisions and
businesses with permanent dual-classes begin to deviate in
year three and become noticeably different by year seven and
beyond (Jackson Jr, 2018). Due to the limitations of the
sample size, the research was temporarily unable to gather
sufficient indicator data on sunset clause firms five years after
listing to investigate longer-term and substantial changes in
patterns.
In light of this, hypothesis H1: ‘the value of firms with a
sunset clause is greater than companies without a sunset
clause ’ holds true in this research. According to the results of
the regression analysis, the valuation of businesses with
sunset provisions is much greater than that of businesses with
permanent dual-class structures in the third year of the life
cycle. However, the change in the value of the two types of
business aforementioned in the fifth year of the life cycle and
beyond is subject to further exploration.
5. Conclusion & Recommendations
This study's primary objective was to explore how the
value of permanent dual-class firms and dual-class companies
with sunset provisions varies over the course of the last four
years since they were listed. A quantitative research approach
was adopted for this study. Firstly, I have matched and
screened the data from two tables of the CII organisation
(Council of Institutional Investors) and the Compustat
database to identify
a final sample of 87 permanent dual-class companies and
36 sunset clause dual-class companies (see Table 1). I then
used the financial data collected from the Compustat database
to calculate Tobin's Q values for the sample companies,
organising them according to years, and created a line graph
reflecting the trend in their enterprise value (see Table 2).
Moreover, I used the OLS regression method to further
explore factors that have the potential to influence a
company's Tobin’s Q value, such as the firm's ROA, cash and
short-term investments, fixed assets, and sunset clauses.
Figure 3 displays the results of the regression analysis.
The results of the study show that dual-class companies
experience changes in valuation over the course of their life.
To be specific, according to Tobin's Q, the valuation of
perpetual dual-class companies is similar in years 0 and 2 of
the life cycle, with a small increase in year 1, followed by a
gradual decrease as the company matures. The value of sunset
clause dual-class firms is at its peak in the year of the first
public offering and then sharply declines from Year 0 to Year
3. The valuations of sunset dual-class companies are
consistently greater than those of permanent dual-class
companies during Year 0 to Year 4 of the life cycle. This
supports Bebchuk and Kastiel's (2017) findings that the
advantages of the dual-class structure, which is based on the
excellent leadership of the founders, will fade over time as the
company goes public and faces more management
inefficiencies caused by the system itself. However, this
calculation result does not consider other factors that may
affect the worth of a company, such as financial condition,
sector, and time. In order to conduct a more in-depth and
precise study,I then took the above factors into consideration
and used OLS regression analysis to arrive at the following
results: the valuation of a company is not significantly related
to whether or not it has a sunset clause in the two years
following the IPO, and it is not until the third year of the life
cycle that the value of a company with a sunset clause
significantly exceeds the value of a company without a sunset
clause. This, therefore, supports the call for a sunset clause to
some extent. When using dual-class share listings, it is also
advised that corporations add a sunset provision based on
time, events, and dilution since, in the long run, companies
with sunset provisions will be more valuable (Jackson Jr,
2018).
6. Critical Reflections
In this research, the deviations of the experimental results
from the previous theory mainly exist in the following areas:
First, this study adopts the empirical framework of Jackson
Jr. (2018), whose experiment shows that perpetual dual-class
share firms are valued higher at the time of their initial public
offerings (IPO), but that as the company matures, dual-class
companies with sunset clauses will be valued higher than
perpetual dual-class firms. According to the study findings,
while the valuation of both types of companies
aforementioned decreases as the company matures, the
valuation of dual-class companies with sunset clauses is
consistently higher than the valuation of perpetual dual-class
companies for the first five years of their life cycle. This
variation may be due to differences in sample selection or
timing.
Second, in the OLS regression analysis, while dual-class
companies with sunset provisions were significantly more
valuable than perpetual dual-class companies in the third year
after listing, their relationship did not show significance in the
fourth year. According to Jackson Jr. (2018), the value of
sunset clause dual-class companies will begin to surpass that
of perpetual dual-class companies in the third to fourth year
after listing and considerably surpass that of perpetual dual-
class companies in the seventh year of their life cycle. Since
a sample of only 36 sunset dual-class companies is included
within this study, I did not have sufficient data to examine
whether the change in the value of dual-class companies four
years after the listing is correlated with their ownership of
sunset provisions.
I am not yet able to determine clearly what the cause of the
above discrepancy is, but academic papers often find
conflicting results and therefore this is acceptable. The dual-
class share system is a good regime that allows capable
entrepreneurs to contribute
more to the long-term development of the firm, but it also
must be used wisely to assist in increasing the value of the
company. The implementation of the sunset clause helps
77
companies to avoid issues, such as inefficient governance and
better protects the interests of minority shareholders, which
optimizes the intrinsic value of the dual-class share regime.
As dual-class share regimes are only just beginning to be
accepted and incorporated into local capital markets in most
parts of the world, there is a significant theoretical gap.
Countries must actively investigate, implement, and enhance
them into a system that is appropriate for their particular
circumstances and capital markets. This study not only adds
to the body of knowledge in the area of dual-class share
regimes, but it also serves as a guide and a point of reference
for further investigation.
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