“CAN ENTREPRENEURS SELL THEIR FIRMS AND STILL OWN THEM?”: THE ADOPTION OF DUAL-CLASS STRUCTURES AND THEIR EFFECTS ON IPO PERFORMANCE

Abstract

Dual-class Structures enable entrepreneurs to separate voting rights and cash-flow rights in arbitrary proportions to exercise control of the firm. Dual-class structures allow entrepreneurs to retain the benefits of being private and reap the benefits of going public. This dissertation identifies the governance, firm-specific, and strategic antecedents of firms that adopt dual-class structures and determines its effect on IPO performance. This study finds that firms that adopt fewer governance mechanisms, have a greater number of insiders, are younger, have a higher level of sales, pursue risky strategies (such as internationalization, acquisition, and innovation) are more likely to adopt dual-class structures. Further, I find that entrepreneurs adopt dual-class structures to gain entrenchment, but shareholders are more concerned about having unity of command in IPO firms than they are about avoiding entrenchment. They likely consider entrepreneurs to have more information about the future value of the opportunities. Thus, entrenchment strategies of entrepreneurs do not appear to have negative effects on IPO performance. We hand-collect data on a comprehensive set of IPO firms that went public between 2006 to 2018 and use a matched sampling research design to draw our conclusions.