Disproportional Control Rights and the Bonding Role of Debt

We examine how firms’ capital structure choices vary with the presence of dual class ownership. We document that, as compared to single class firms, dual class firms have higher leverage, greater propensity to issue private debt, greater reliance on relationship lending, as well as more frequent use of cash sweeps and performance-based covenants. These results are robust across several approaches (propensity score matching, instrumental variables, and treatment effects models) to control for the endogeneity of ownership structures. This evidence is consistent with controlling insiders bonding against the agency problems associated with dual class ownership through debt contracting. In further corroboration of this theory, our cross-sectional analyses reveal that dual class firms with greater agency conflicts have higher levels of debt. Finally, we document that leverage attenuates the adverse effect of dual class status on Tobin’s q. Taken together our evidence suggests that debt plays a governance role and disciplines insiders in dual class firms.