Formal finance involves the costly acquisition of information about distant entrepreneurs, while relationship-based finance allows financiers to fund a narrow circle of close entrepreneurs without acquiring costly information. In developing economies with low capital endowments, relationship-based finance is optimal because only high-quality entrepreneurs receive funding. However, formal finance may emerge in equilibrium, and it has the only effect of shifting rents from entrepreneurs to financiers. In more

The Life Cycle of Dual-Class Firm Valuation

The Review of Corporate Finance Studies
Volume 13, Number 2
pp. 459–493
Date published:
Published Article
Working paper version

Abstract We examine U.S. dual- and single-class firms from 1980 to 2019 and document their valuation differences over their corporate life cycle. At the IPO, dual-class firms have higher mean valuations than do single-class firms, and some evidence indicates that this premium may emanate from dual-class firm founders’ unique vision and leadership skills. As firms age, the valuation premium of dual-class firms tends to dissipate, possibly because dual-class agency problems increase due to a gradual widening of the wedge (the difference between insider voting and cash flow rights) in the post-IPO years. (JEL G32, G34)

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