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 (“dual-class premium”) within the context of a mandatory bid rule. This rule implies that the acquirer of a control block is also obliged to offer minority shareholders the same (or partially the same) price for their shares. In the presence of the rule, the dual-class premium represents a premium for the likelihood for corporate takeovers. Our paper innovates in the sense that we focus not only on bid rules imposed by Brazilian legislation on all domestic firms, but also on such rules that are voluntarily granted by companies for their minority shareholders in conditions beyond what is legally required. We also use a broad corporate governance index in order to capture, on a firm-level basis, the effect of investor protection on the dual-class premium. The dual-class premium is positively related to the mandatory bid rule, suggesting a positive takeover premium. Further, the premium increases (decreases) in response to enhancement (lowering) of investor protection via regulatory alterations in the rule. The premium also is inversely related to the firm’s corporate governance practices suggesting that poor corporate governance makes it more likely that the firm will be taken over. The results suggest that takeovers are more likely at firms with poor corporate governance provisions and weak takeover rules on mandatory bids.