Management entrenchment and the valuation discount of dual class firms

• Dual class firms are discounted compared to single class firms with concentrated ownership.
• Dual class CEOs and directors have a longer tenure than their counterparts in single class concentrated control firms.
• Longer CEO and director tenure conditional on dual class firm underperformance is consistent with managerial entrenchment.
• The paper provides evidence that the greater the degree of entrenchment, the larger the dual class discount.

Prior studies provide empirical evidence that dual class firms are discounted compared to single class firms due to the extraction of private benefits. This study examines the link between managerial entrenchment and the dual class discount. Using propensity score matching and conditioning for past underperformance, the paper shows that investors apply a greater discount to the value of dual class firms as the degree of managerial entrenchment increases. The impact of entrenchment on dual class discount is more pronounced when the CEO is the controlling shareholder compared to when the controlling shareholder is a director or the chairman of the board.