Dual-class premium, corporate governance, and the mandatory bid rule: Evidence from the Brazilian stock market

This paper conducts a systematic analysis of the determinants of the relative price difference between voting and non-voting shares, i.e., the “dual-class premium,” within the context of a mandatory bid rule. While the removal of the mandatory bid rule can increase potential gains from control, it can also weaken protection for minority shareholders. We provide evidence that the latter effect dominates by showing that the premium increases (decreases) in response to enhancement (lowering) of investor protection via regulatory alterations in the rule. The premium is lower in government-owned firms, which may be an indicator that control transfers, that allow benefits from the mandatory bid rule to accrue to minority shareholders, are less likely in government-owned firms. We also find that the premium is inversely related to an index designed to capture the firm's corporate governance practices. The results suggest that expropriations of minority shareholders are more likely at firms with poor corporate governance provisions and weak takeover rules relating to mandatory bids.