Author:哈特中心 Date:2022-12-09
Speaker: Shicheng Jiang
Topic: Do Sunset Clauses improve Dual-class shares?
Abstract:
The dual ownership structure has become one of the most controversial issues in the capital market today, which has triggered a corporate governance debate among academia, regulators, policymakers and investors. Some institutional investors believe that the dual ownership structure allows entrepreneurs to harm the interests of investors, and advocate imposing some restrictions, such as sunset clauses. Based on the incomplete contract theory, this paper constructs a model between entrepreneurs and external investors. In this model, entrepreneurs always tend to maintain control, which is also in line with the interests of external investors in some cases, but not in other cases. Once the interests of both parties conflict, both parties may have differences on whether to retain the dual equity. If there is no agreement on whether to convert the dual equity into one share and one vote, the retaliation action of both parties will incur costs. The sunset clause has the function of determining its reference point afterwards, but it is difficult to conclude a contract on the best contingency of the sunset clause in reality, because the triggering conditions of the sunset clause are usually not verifiable afterwards. We have proved the optimal conditions of sunset clauses. Most sunset clauses are non contractual, and in practice, most sunset clauses are sub optimal arrangements. Only when the founder's importance to the company tends to decline over time, the time-based sunset clause is optimal, while the event based sunset clause is selected only in a few verifiable or extreme cases. We also discussed whether the policy level should be consistent with the sunset time requirements, and conducted an empirical study on 109 dual equity structure companies listed in the United States. The results show that the ROE of dual equity structure companies with sunset clauses of 7, 8 and 9 years is significantly higher.
Location: via Zoom; Room 318
Meeting Time: Dec. 7th, 2022, 21:15pm CST; Dec. 7th, 2021, 8:15am EST