Disproportionate insider control and the cost of equity capital: evidence from U.S. dual-class firms

We investigate the cost of equity capital for U.S. dual-class firms. While prior literature finds a positive association between excess insider control and the cost of capital in international contexts, these results are primarily concentrated in countries with relatively weak investor protection and legal enforcement. It is therefore an open question whether these findings hold for the U.S. capital market. Additionally, we investigate a possible moderating role of the firm’s information environment on the association between disproportionate insider control and the cost of capital. We find the cost of equity capital for U.S. dual-class firms is, on average, approximately forty basis points higher than that of single-class firms and that this premium increases in disproportionate control rights. Moreover, we find a significant moderating effect of the firm’s information environment: the cost of equity premium for dual-class firms is particularly pronounced when the information environment is poor, suggesting dual-class firms’ elevated cost of capital may be mitigated by a higher quality information environment.