Abstract

This paper examines how the use of mechanisms separating voting rights from cash flow rights – such as dual share classes, pyramid structures and voting pacts agreements– influence the valuation of firms at IPO. We claim that these mechanisms, adopted by founder-CEOs to insulate them against the market for corporate control and to maintain private benefit extraction, have negative effects on IPO valuation. However, we also claim the negative impact of these disconnecting mechanisms on IPO valuation to be moderated by (1) firm size and age and (2) founder-CEO’s status and equity retained at the IPO. We examine our claims using a unique hand-collected dataset of all 258 IPO’s involving founder-CEOs completed in the French capital markets from 1995 to 2010. We find support for our first claim. We found only mixed support for our second claim with retained equity moderating the effect.

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