Literature review of Dual Class Stock Structures(Benefits ,Costs)

            In financial markets, companies issue shares to raise share capital. A share represents an association among the company and its shareholders. A single class share is a designation applied to a specified security type, whereas dual class share is the issuance of several share types by a single entity. Such shares can be different based on the voting rights of shareholders and payment of dividends. In general, dual class shares outperform single class shares due to the fact that its one share class is available for company executives, founders and their families who have more power of voting than the general public and provides more control of the company. This enables the company management to focus on long-term value creation rather endow with short-term performance requirements. Since dual stock class help corporate managers to hold common stock for its underlying voting rights and increasing their impact on-going market policies, thus governing the company decision making. The companies with dual class shares also outperform more comparative to single class shares because companies with dual class structure are sending the message that they want to control more the votes without risk. It simply means that dual class share companies just need the capital of the public, not their opinions (Govindarajan & Srivastava, 2018).

        Furthermore, we conclude that single class share companies have their market value higher than their total assets for most years and on the increasing trend for the period 1990 to 2002. This concludes that single class companies effectively utilize the assets and have a better funds utilization capability from stakeholders and investors to generate profit and company growth. Because of the limitations on general shareholder rights that are part to dual-class shares, some institutional investors, including pension funds, won’t consider them. While it is difficult to determine how this most recent trend toward dual class shares will impact share prices in the future, the company’s shares may suffer a long-term drag on share price because of not having broad institutional ownership. Another issue to consider carefully before using a dual class shares is access to additional capital in the future. If market conditions deteriorate, it may be more difficult to raise debt or equity with a dual class structure. The dual class shares also have weaker corporate governance structures.

Trend (Statistical Trend) of  Dual Class Stock Structures(Benefits ,Costs)

        There has been seen an increasing trend toward unifying the dual class structures in the US and Europe over the last few years. This rising tide of dual class shares considered to be a recipe for executive’s entrenchment and shareholders rights erosion. However, since the trend of issuing dual class shares continues institutional investors should remain vigilant to protect shareholders’ voting rights. A total of 130,452 firms had been taken to investigate the trend of single class and dual class shares for the period 1970 to 2002. Figure 1 and Figure 2 reflects the percentage growth of single and dual class shares over the under studied period of time. For the year 1975 to 1989, companies prefer to use single class shares while not a single firm followed the multi class share structure. A gradual raising trend in dual class shares can be seen from 1990 to 1993, where 11 firms raise capital through the dual class structure. Moreover, the number of dual share firms has increased significantly over the last eight year, that is, from 1994 to 2002 as shown in the Figure 2. This increasing trend results in decrease of single class share growth from 99.87 percent to 93.51 percent. The number of dual stock companies rose from 11 to 2,976 firms; depicting an increase of 269.5 percent. Besides this increasing growth trend in dual share class structure, drastic increase in single share class is also observed after 2000 by 0.71 percent.

Hypotheses and test result.

In order to compare the performance of dual class shares to the single class share, two sample t-test of unequal variance (also called Aspin-Welch test or Satterthwaite method) is applied. The test assumes that the distribution of the two populations is normal. To execute a two sample student’s t-test on data sets from two independent populations (dual class shares and single class shares) with unequal variances, first it is important to define the null and alternative hypothesis.

Null Hypothesis (H_o): The difference between the means of the two samples is zero (There is no significant difference in the means of each sample)

Alternative Hypothesis (H₁):There is an indication of a difference between the means of the two samples (There is a significant difference in the means of each sample)

The Table 1 provides the two sample student’s t-test results for dual class and single class shares means over the period 1994 to 2002. From the table it is concluded that there is statistically significant difference in the dual class and single class shares mean value for the year 1994 as the p-value is smaller than the level of significance of 0.05, indicating that we reject the null hypothesis in the favor of alternative hypothesis. This significant difference in the means can also be explained by looking at the t-statistics values in the Table 1. Since the t-statistics value (12.11) is greater than the critical value (+1.96) which shows that there is an indication of a difference between the means of the dual class shares and single class shares

Similarly, there is a significant difference in the means of each sample (dual class and single class shares) found over the years 1995, 1996, 1998, 1999, 2000, 2001 and 2002 because there p-values are less than the alpha value, that is, 0.05, thus results in the acceptance of alternative

hypothesis that there exists a difference between the means of the dual class and single class shares samples. Furthermore, two sample student’s t-tests concluded that the difference between the means of dual class and single class shares is zero for the year 1997, as the p-value found to be greater than the level of significance of 0.05. This is also confirmed from the t-statistics value. This indicates that there is no significant difference in the means of dual class and single class shares for the period 1997, which means that we failed to reject the null hypothesis.

        This section of the study conducted two sample t-tests to compare the firm performance across the two groups assuming unequal variances. The performance measures included are ROA, ROE, Profit Margin and Tobin’s Q.

Return on Assets (ROA): Return on Assets is a very important measure of performance. It shows the efficiency with which the assets of an organization are being used to generate revenues. Higher this ratio is better for the organization, as it shows that the management of the organization is efficiently utilizing the assets of this organization. The ROA of the firms with dual class share is always high comparative to the single class share over the span of 12 years from 1990 to 2002 as shown in the Figure 3. The firms with dual class structure follow irregular and unstable profit utilization for their assets, whereas single class share firms found to have stable utilization of profits. The growth dropped from a good peak on constant basis for dual stock structure firms, thus it can be concluded that investment should be made considering ROA ratio for single class share firms and not the firms having multi class shares.  The t-test indicates that although there is no statistically significant difference between the financial performance of both single class and dual class shares in terms of ROA as the p-value is greater than the level of significance of 0.05, so we have to accept the null hypothesis.

        Comparing the volatility of single and dual class stock structures, it is notable that the elements of volatility such as the average mean present significant differences. For both single and dual class share, the average mean does not have any significant effect (Altuwaijri, 2016)[33]. However, the volatility is higher for dual class shares as compared to the single class share portfolio. Concerning ROA, the third finding presents that dual class stock structure has higher values and lower market values. For the single class share, the ROA is similar to that of dual class share (Kim & Michaely, 2018)[19]. The presentation for ROE is similar to that of ROA because their performances rely on one another.
The dynamics of the price of the securities and shares in the stock market defines the volatility. A stable price of shares and relevant securities indicates lower volatility. Volatility means that the investors of a given company may benefit or make losses in the stock market. Also, a lower volatility indicates low risk in the business portfolio. For short-term traders, volatility is one of the critical factors to consider while trading in the stock market. Volatility is the determinant for profit or losses in the business portfolio. A lower increase in volatility means low profit for investors and vice versa (Li, Wu & Zhou, 2018)[31]. It is essential to note that without the volatility, the investors will not realize any profit on their investments. The same concepts of volatility apply to both ROA and ROE in the stock exchange portfolio.
Anecdotal Evidence for Dual Class Share Performance Considering the financial statements of Snapchat and Facebook companies, it is notable that dual class share performance is promising. For Snap Inc., the dual class share performance as at October 2018 is $8.18, which is an increase of 2.09% compared to the previous value. For Facebook, the dual class share performance as at October 2018 is $159.33, which is an increase of 1.91% compared to the previous value (Kim & Michaely, 2018)[19]. Please note that the share performance values are based on the 2018 third-quarter financial statements ending September 2018.

        The term two-sample t-test refers to a statistical analysis for data common used to test the hypothesis by rejecting or accepting the null hypothesis based on the results (Anderson et al., 2016). The analysis is applied when we want to compare if there mean or average between two groups of data are significantly different or the difference has just occurred due to random chance (Silverman, 2018). For instance, the two-sample t-test helps in answering questions such as whether the mean rate of success is higher after the new sales tool has been implemented than before the implementation (Ott & Longnecker, 2016). In this context, the two-sample t-test assuming unequal variance will be conducted to assess if there a significant difference in means of ROA, Profit Margin, ROE and Total debt, Total Asset, Compared Market Value and Compared Tobin’s Q between dual class firms and single firms.

Return on Equity (ROE): Return on Equity (where equity is the difference between a firm’s total assets and its total liabilities) measures the profitability of an organization for every rupee of equity the investors have invested in the organization. It shows the money made for every rupee of equity put into the organization by the investor. Higher the ratio, better it is for the organization. It is commonly used in order to ascertain the returns. Figure 4 shows the comparison between the ROE of the single class share and dual class shares companies for the period 1990 to 2002. The dual share firms found to be profitable for most of the years, covering a great margin over the year 1993. The profitable years were 1993 to 1997, 1999, 2000 and 2002 which means 10 years in profitability. However, dual share firms despite profitability also show an unsteady graph like single class share firms where most of the times profit (return) is decreasing. Hence, we concluded that loss in earnings was irregular and drastic in both single share and dual share companies, yet dual class structure firms perform better based on ROE ratio. The t-test also indicates that although there is no statistically significant difference between the financial performance of both single class and dual class shares in terms of ROE as the p-value is greater than the level of significance of 0.05, so we have to accept the null hypothesis.

Profit Margin (PM): Profit margin, also sometimes called net profit ratio is a measure of profitability obtained by dividing the net income (or net profits) by revenue (or sales). The t-test indicates that although there is no statistically significant difference between the financial performance of both single class and dual class shares in terms of profit margin as the p-value is greater than the level of significance of 0.05, so we have to accept the null hypothesis. Moreover, mean value depicted that the profit margin of single class shares is high to dual class structures.

Comment on the results of the comparison.

        A total of 130,452 firms had been taken to investigate the trend of single class and dual class shares for the period 1970 to 2002. For the year 1975 to 1989, companies prefer to use single class shares. However, the number of dual share firms has increased significantly over the last eight years from 1994 to 2002 depicting an increase of 269.5 percent. This increasing trend results in decrease of single class share growth from 99.87 percent to 93.51 percent. The analysis also concluded that there is statistically significant difference in the dual class and single class shares mean value as the p-value is smaller than the level of significance of 0.05 for the year 1994-1996 and 1998-2002. Furthermore, two sample student’s t-tests concluded that the difference between the means of dual class and single class shares is zero for the year 1997.

        To explain the increase in trend, Managers have more incentive to dual class shares because dual class share is not outperform due to the fact that one share is available for the company founders and family have more power to vote. Also, member single class shares due to the fact that its one share class is available for company executives, founders and their families who have more power of voting than the general public and provides more control of the company. This enables the company management to focus on long-term value creation rather endow with short-term performance requirements. The companies with dual class shares also outperform more comparative to single class shares because companies with dual class structure are sending the message that they want to control more the votes without risk. The dual share structure keeps companies from being purchased in whole prior to being too large to be acquired.

        The firms with dual class structure follow irregular and unstable profit utilization for their assets, whereas single class share firms found to have stable utilization of profits which means that investment should be made considering ROA ratio for single class share firms and not the firms having multi class shares. On the basis of ROE ratio, it is observed that loss in earnings was irregular and drastic in both single share and dual share companies, yet dual class structure firms perform better. Furthermore, we conclude that single class share companies have their market value higher than their total assets for most years and on the increasing trend for the period 1990 to 2002. This concludes that single class companies effectively utilize the assets and have a better funds utilization capability from stakeholders and investors to generate profit and company growth.

 References of of  Dual Class Stock Structures(Benefits ,Costs)

Govindarajan, V., & Srivastava, A. (2018). Reexamining dual-class stock. Business Horizons, 61(3), 461-466. doi: 10.1016/j.bushor.2018.01.012

 Bebchuk, L., & Kastiel, K. (2017). The Untenable Case for Perpetual Dual-Class Stock. SSRN Electronic Journal. doi: 10.2139/ssrn.2954630