Encouraging long-term shareholders:

The effects of loyalty shares with double voting rights

Abstract:

The 2014 passage of the Florange Act in France changed an opt-in provision for loyalty shares (allocating a second voting right for shares held at least two years) to an opt-out provision with shareholder approval. We find that before 2014, loyalty shares were popular among small family firms. Following the Act, firms with a one share – one vote structure that announced they would opt out of the law incurred a negative market reaction, suggesting that shareholders have a positive perception of loyalty shares. It appears that by encouraging costly monitoring by long-term shareholders, loyalty shares can potentially benefit all shareholders.

JEL classification: G32; G34

Keywords: Loyalty shares, long-term shareholders, double voting rights, investor horizons, control enhancing devices, corporate governance, monitoring

1

Introduction

Investors, corporate managers and regulators have long been concerned about the relation

between investors with short-term horizons and the potential for encouraging managerial

myopia. For example, the CEO of BlackRock, Laurence Fink, urged chief executives of large

U.S. and European corporations, to resist “the powerful forces of short-termism afflicting

corporate behavior.”1 Further, according to a 2013 McKinsey survey, such investor pressures

have been increasing in recent years.2 In response to these concerns, a number of initiatives

have developed, such as business and investor groups organizing to combat these forces

(FCLT Global, American Prosperity Project) as well as governments enacting or proposing

laws to change managerial and investor incentives.3 One proposed solution to the short-

termism problem is to allow firms to deviate from the principle of one-share one-vote by

giving longer-term shareholders multiple voting rights. The argument is that shareholders are

then encouraged to hold their shares for longer periods and the existence of such shares in a

firm attracts investors with longer-term horizons. In fact, some governments have adopted

laws to encourage investors to hold their shares longer and avoid short-termism. For example,

in 2014 France enacted the Florange Law, which shares with multiple voting rights awarded

to the longer term shareholders became an opt-out mechanism rather than an opt-in

mechanism. That is, automatically companies would have the multiple voting rights system

unless they explicitly changed their corporate charter to eliminate it.

Debates have arisen surrounding the question of whether disproportional ownership

rights, i.e., deviations from the one-share one-vote principle, benefit or harm shareholders in

1 2016 letter from BlackRock CEO, Laurence Fink, to CEOs. 2 McKinsey Survey 3 Focusing Capital on the Long Term (FCLT Global) is a not-for-profit organization founded in July 2016

by the Canada Pension Plan Investment Board, McKinsey & Company, BlackRock, The Dow Chemical Company and Tata Sons dedicated to developing practical tools and approaches that encourage long-term behaviors in business and investment decision-making. The American Prosperity Project has been developed by the Aspen Institute as a non-partisan framework for a national conversation on long-term investment and ways to overcome the short-term thinking currently baked into government policy and business protocols.

2

general. In addition, there exists extensive debate regarding whether short-termism is actually

harmful to shareholders as claimed. The investor, business and governmental initiatives to

combat short-termism, such as the Florange Act, rely on a two-part argument: (1) short-

termism is a problem negatively affecting corporate managers’ decision-making and (2) firms

benefit from long-term shareholders because they provide more stability and support for a

focus on long-term strategic decisions. The first part of the argument is supported by

theoretical work (e.g., Stein, 1988; Shleifer and Vishny, 1990; and Bolton, Scheinkman, and

Xiong, 2006), surveys and interviews (e.g., Graham, Harvey and Rajgopal, 2006) as well

empirical analysis that suggests executives’ myopic behavior leads to destruction of firm

value (e.g., Ladika and Sautner, 2014).

With regard to the second part of the argument – whether long-term shareholders add

value to a firm – theory and empirical evidence suggest that blockholders help combat

managerial myopia in addition to increasing firm value (Edmans, 2009; Albuquerque and

Schroth, 2010). Further, a number of empirical studies document a relation between

shareholders’ investment horizons and firms’ decisions and performance, suggesting that

long-term investors strengthen corporate governance and restrain managerial misbehavior

(e.g., Bushee, 1998; Chen, Harford and Li, 2007; and Harford, Kecskes and Mansi, 2015).

In contrast to the arguments regarding the difficulties created by investor and managerial

short-termism, many believe that the problem is overblown, that it is imaginary (Roe, 2015), a

myth (Surowiecki, 2015), and the perception of investor influence appears primarily because

of a sorting of investors according to their investment horizon preferences (Maubossin and

Callahan, 2015). Further Fried (2015) argues that reasons exist to view either short-termism or

long-termism as potentially problematic for shareholders and that the issue is primarily an

empirical question.

3

The introduction of the French law provides an ideal laboratory to bring empirical

analysis to these debates. The Florange Act requires a mechanism specifically designed to

encourage longer-term investor horizons, shares with multiple voting rights granted to

shareholders after a designated period of time. Although such shares exist in several countries,

they had been particularly prominent in France even before the Florange Act. Since 1966,

firms could issue so-called loyalty shares, in which long-term shareholders receive greater

benefits, provided the benefits were specified in the corporate articles of association. Thus,

the increased rights accompanying loyalty shares were an opt-in provision for the company.

In 2014, the French government passed legislation (the Florange Act) requiring firms to issue

a specific type of loyalty share unless the firm chooses to opt out through a shareholder

election. Specifically, the law requires that if a shareholder holds registered shares for at least

24 months, they are automatically granted double-voting rights. The Act also established that

firms not wanting to include this provision in their corporate structure could opt out through a

supermajority vote (two-thirds of the votes) at their general meeting.

The long-term horizon implications created by voting rights loyalty shares are important,

particularly as these shares have been widely adopted by two-thirds of French listed firms.

Loyalty shares are argued to be beneficial because they empower long-term investors by

encouraging these investors to monitor the firms’ managers, and at the same time protecting

the managers from financial market short-term pressures, ultimately benefiting all

shareholders.4 However, shares with multiple voting rights can create externalities as well

because differentiated voting rights can amplify the risk of private benefits extraction by

blockholders, which is then detrimental to the minority shareholders. (For example, prior 4 In France, the Florange law could primarily benefit blockholders. The implication would then be that

blockholders benefit the firm. Empirical evidence suggests this to be the case. For example, Albuquerque and Schroth (2010) find that blockholders matter for firm value. Using a structural model of the determinants of the block premium in private negotiations of minority blocks, they estimate that, absent private benefits, the presence of a blockholder implies an increase in share value of 19%. See, for example, Holderness and Sheehan (1988), Edmans (2009), Edmans (2014) for further evidence on the role and importance of blockholders.

4

literature typically argues that disproportional voting structures aggravate the agency problem

between managers and shareholders and between minority shareholders and controlling

blockholders, since blockholders bear a smaller proportion of the financial consequences of

their decisions.5)

By employing a sample of French firms around the adoption of the Florange law, our goal

is to disentangle the contrasting arguments regarding the perceived benefits of loyalty shares

and in so doing provide an empirical analysis regarding short-termism. We thus examine the

question of whether encouraging long-term shareholders is perceived to be beneficial or

harmful along with the interconnected issue of whether multiple voting right shares are

advantageous for shareholders. In order to analyze these effects, we examine two primary

issues. First, we consider the loyalty share adoption choice and its relationship to firm

characteristics. We examine this choice from several perspectives: (1) firms’ choices on

whether to adopt loyalty shares prior to 2014 (when adoption was voluntary); (2) firms’

choices on whether to adopt loyalty shares after 2014 (when firms could either adopt the

shares or hold a shareholder vote to opt out from offering double voting rights to long-term

shareholders); and (3) whether systematic differences exist among the firms that made the

alternate choices.

The second primary issue we consider is whether loyalty shares add value to a firm. We

examine this issue in two ways. First, we test whether loyalty shares are associated with

higher firm operating performance. Second, because of the requirements of the Florange Law

we are able to test for shareholders’ reactions to the company’s choices regarding the multiple

voting rights shares and consequently assess whether investors perceive these shares to be a

value-enhancing mechanism.

5 See Adams and Ferreira (2007).

5

In a multivariate analysis of the choice of offering differential voting rights prior to the

Florange Act of 2014, when firms could opt in and voluntarily choose the mechanism, we find

that the early adopters of loyalty shares had distinct firm characteristics. First, the firms with

double-voting rights loyalty shares before the Florange Act tended to be smaller, older and

more closely-held. Further, we find differences in ownership structure. The use of double

voting rights has a non-monotonic relation with the percentage of shares owned by the main

shareholder: For small stakes, the use of double voting rights increases, whereas for large

ownership it decreases. These findings suggest that double voting rights have been more

important for smaller blockholders in closely-held firms, particularly in those cases where

financial constraints are important. Despite the French government’s strong backing of loyalty

shares in 2014, in the earlier period, government involvement in the firm, i.e., state

ownership, decreases the likelihood of using double voting rights.

The use of the double voting rights to combat hedge fund encroachment also appears

evident as the adoption of loyalty shares is associated with a larger percentage of capital held

by hedge funds. The passage of the Florange Act was particularly opposed by institutional

investors and correspondingly, we find that firms with greater institutional investor ownership

adopt the loyalty shares with double voting rights less than do other firms.. Consistent with

the hypothesis that loyalty shares enable the use of private benefits, we find that firms in

private benefit industries implement the double voting rights structure more frequently than

firms in other industries.

We then consider the potential valuation consequences of loyalty shares. We examine the

relation between a firm’s return on assets and its use of loyalty shares, which implies

ownership by longer term shareholders. Controlling for other firm characteristics, we find that

the double voting rights are associated with higher profitability. Further, this effect cannot be

attributed solely to family firms, as controlling for the identity of blockholders does not

6

change the result.6 Given that double voting right shares are especially valuable in industries

characterized by a potential for private benefits, the findings together suggest that double

voting rights may empower blockholders in industries in which stewardship is most beneficial

to all shareholders. These results appear to contrast with those reported by Claessens et al

(2002) and Lemmon and Lins (2003) that separation of cash flow rights and control rights

leads to poor performance.

However, even if we control for firm characteristics, our results on double voting rights

enhancing performance, as well as those of the previous literature on control-ownership

deviations, suffer from endogeneity problems. The first problem is reverse causality as firms

choosing to grant loyalty shares to their shareholders may have better performance than firms

without loyalty shares. The second endogeneity problem is omitted variables: a common

variable explaining both double voting right adoption and firm performance.

To mitigate these endogeneity concerns, we use the enactment in 2014 of the Florange

law as a natural experiment to examine shareholder reaction to firms’ disparate choices. For

firms that did not have loyalty shares prior to 2014, the passage of the law forced an important

choice: (1) explicitly opting out of issuing loyalty shares, (2) explicitly opting into loyalty

shares or (3) allowing the loyalty shares to be automatically imposed on their firm. To capture

investors’ perspectives about these choices, we examine market reaction to the announcement

of their choice in the agenda of the general meeting following the Florange law. We find

systematic differences in the market reactions to the choices made by firms without pre-

existing double voting rights. Those firms that announced their choice of opting out of the

automatic granting of double voting rights incurred a significantly negative market reaction to

the announcement. In contrast, for firms announcing the adoption of loyalty shares the market

reaction was significantly positive. This positive return to double voting rights adoption

6 Anderson and Reeb (2003) find family firms perform better than nonfamily firms.

7

remains after controlling for ownership and financial characteristics of the firm, suggesting

that current shareholders value voting right loyalty shares. These results are consistent with

loyalty shares being valuable for shareholders and in favour of stewardship features of

blockholder enhanced control.

Our paper makes several important and novel contributions to the literature. First, we

contribute to the literature concerning the effects of short- and long-term shareholders on

firms’ financial decisions (e.g., Bushee, 1998; Gaspar, Massa, Matos, Patgiri and Rehman,

2012; Derrien, Kecskes and Thesmar, 2013; Asker, Farre-Mensa and Ljungqvist, 2015; and

Barrot, 2016). Most of these studies rely on portfolio turnover to capture the horizon of

investors. We use a more direct measure, the use of loyalty shares, to assess the impact of

long-term shareholdings on firm value.

The second area of the literature to which we contribute concerns the debate on the value

of differentiated voting rights and whether deviation of ultimate control from ownership

affects minority shareholders’ wealth.7 For example, previous studies have used

announcements of events that changed firms’ voting rights structures (e.g., Partch, 1987;

Jarrell and Poulsen, 1988; Dimitrov and Jain, 2006; Ang and Megginson, 1989; and Maury

and Pajuste, 2011). However, the results are mixed with some studies concluding that the

introduction of superior voting shares leads to positive effects on firm valuation while others

claim decreased firm valuation. However, as pointed out by Adams and Ferreira (2007),

important endogeneity concerns exist for this literature as firms deciding to change their

voting structure would be those that expect to benefit the most from this decision. Bauguess,

Slovin and Sushka (2012) argue that introducing a differential voting structure enhances

monitoring and reduces its cost by allowing dominant shareholders to diversify their personal

wealth without losing control. Further, Ginglinger and Hamon (2012) find that the double

7 For a survey of the economic literature on disproportional ownership, see Adams and Ferreira, 2007.

8

voting rights obtained through loyalty shares, not only reward long-term shareholders, but

also restrain the inside trading of the shares, enhance liquidity for minority shareholders of

small and closely-held firms, and thus, can be beneficial for both controlling and minority

shareholders. Given the endogeneity concerns in the previous literature, we contribute by

using the 2014 French law (Florange Act) as a natural experiment to test the impact of an

explicit decision on maintaining a one-share-one-vote structure or switching to double voting

right on value of French firms. Our findings confirm that control-enhancing mechanisms can

have a positive impact on firm value.

The remainder of the paper is organized as follows. In Section 2, we discuss the

expectations of differential voting rights in the loyalty shares setting. In Section 3, we present

the data and in Section 4, we report our empirical results. We provide our conclusions in

Section 5.

2. Loyalty shares, firm choices, and firm value

Since loyalty shares are designed to incentivize shareholders to take a longer-term focus,

they allocate differential rights to shareholders who hold their shares continuously for a

minimum specified period of time. These rights can be voting rights, bonus dividend, bonus

shares or warrants. There exists an active debate within the financial community and among

practitioners between those who argue that loyalty shares should have positive effects for

firms and shareholders and those who are critical of the scheme.8

In perfect capital markets, the investment horizon of investors should not matter, as a

firm’s stock price always equals its fundamental value and as arbitrage makes payout policy

8 See for example the Blackrock Company’s publication on “Key considerations in the debate on

differentiated voting rights” April 2015.

9

irrelevant for stock prices (Miller and Modigliani, 1961).9 Adding loyalty shares changes this

expectation as it creates differential voting rights that depend on the investors’ horizons.

Through the design of loyalty shares, the government and company’s intents are to attract

longer-term shareholders and generally, to lengthen the horizon of investors, under the

assumption that longer-term shareholders are beneficial for the firm. Loyalty shares are also

designed to empower blockholders, with the intent of reducing the cost of monitoring and

increasing blockholders’ willingness to provide stewardship for the firm.10 However,

advocates of the one share – one vote principle argue that loyalty shares are harmful along a

number of dimensions such as introducing discrimination between shareholders, favoring

private benefits for insider or founder blockholders, and increasing the administrative costs

and complexity to register the loyalty shares (especially for institutional investors and cross

border investors). Arguments are also made that loyalty shares do not change the investment

horizon of the majority of the shareholders, that some will game by holding the shares long

term, but then use derivatives to eliminate their economic exposure to the stock and that when

investors sell shares in firms with loyalty shares, it can lead to a stock price decrease for

current shareholders.

In Burkart and Lee’s (2007) review of the theoretical literature on the optimality of voting

structures, they determine that the impact of voting arrangements depends on the ownership

structure. For widely-held firms, a one share - one vote structure ensures the socially efficient

control allocation when several bidders compete, but beyond the particular takeover situation,

the stock’s voting structure does not appear to have a specific role. In contrast, for more

closely held firms, a one share - one vote structure may weaken the influence of a controlling

9 However, the investment horizon can matter if stocks are mispriced because short-term investors may

want to sell their shares before the mispricing is corrected, whereas long-term investors are able to wait until the stock price returns to its fundamental value

10 Loyalty shares could also benefit a firm if they reduce the available shares for lending purposes and if stock lending through its aid of shortselling is detrimental to firm value.

10

minority blockholders and lead to increase the manager-shareholders conflict, and therefore

be detrimental to firm value.

Given these considerations, we develop the following hypotheses regarding the

differences in firm characteristics between firms that adopted loyalty shares prior to 2014.

First, we expect to find that firms with loyalty shares are more likely to be smaller firms with

minority share blockholders and in which private benefits are more available to insiders. Such

shares would be less likely in larger firms with institutional investor holdings. The question

of whether loyalty shares add or detract from firm value is an empirical question as discussed

previously. If long-term shareholders are perceived as beneficial for firms, then we expect a

positive relationship between the existence of loyalty shares and firm value. On the other hand

if the externalities caused by loyalty shares are sufficiently egregious, then we expect a

negative relationship between the existence of loyalty shares and firm value.

3. Data

3.1. Double voting rights and one share – one vote companies

Our sample data are taken from the Thomson Financial, Thomson One Banker and

Worldscope databases. First, we include all firms with non-missing values for total assets and

market capitalization that are classified as French and publicly traded in Thomson Financials.

This gives us 694 unique companies. Details regarding the existence of double voting shares

are then manually collected from the firms’ annual reports. We exclude 115 companies

because we were not able to collect relevant data and are thus left with an original sample of

579 observations.

Out of this initial sample, 388 (i.e., 69.8%) companies have corporate charters that

allowed double voting shares prior to the Florange Act. This figure is very close to that

reported in Ginglinger and Hamon (2012) who observe that 68.3% of French listed firms in

11

2001 exhibit a double voting share structure. The other subsample of 175 firms that did not

allow double voting shares prior to 2014, i.e., the one share - one vote structure firms, is of

particular interest for our analysis. To the extent that the Florange Act generalizes double

voting rights, those firms out of this group that wished to introduce differentiated voting

rights are not required to organize a shareholder vote. Conversely, the firms that want to stick

to the one share – one vote principle must call an extraordinary general meeting and ask their

shareholders to vote in favor of a proposal that rejects the double voting arrangement.

We investigate the choices of these 175 firms and thus examine the general meetings that

follow the enactment of the Florange Act. A vast majority of firms put proposals pertaining to

voting structure at the 2015 general meeting. We notice that few companies (21, i.e. 12%)

organize an “early” consultation of their shareholders during the 2014 general meeting

(sometimes very few months after the enactment of the Florange Act). We exclude two

companies due to late general meetings, which reduces the sample size to 173.11 In 111

companies, a proposal for the rejection of double voting share was brought to vote (see for

example AIR LIQUIDE in Appendix B). The proposal to reject double voting was accepted

for the vast majority of these companies (91.89%, 102 companies), with an average (median)

vote in favor of 98.53% (99.92%).

Despite such high votes to reject disportionate voting rights for the majority of the

companies, the resolution was rejected in nine companies as they did not achieve the two-

thirds majority shareholder vote required to maintain the one share – one vote principle. A

focus on this subgroup provides valuable insights. In three companies (AIR FRANCE,

11 We notice that some firms with a fiscal offset (closing at a different date of 31 December) have the

possibility to organize a “catch-vote” at the 2016 general meeting (i.e., they ask their shareholders to approve a modification of the voting scheme if they did not in 2015) before the deadline of April 2 2016. For example, EuroDisney closed in September 2015 and held a general meeting in February 2016. For these firms, we thoroughly examine the invitation to the 2016 general meetings and notice that only 2 (excluded) companies put proposals pertaining to the voting structure.

12

ENGIE, RENAULT), the French state held a significant stake and voted against the proposal.

The resolution was put forward by activist investors and/or not approved by the board of

directors in three companies (ORANGE, VEOLIA, VIVENDI). Their failure to pass the

shareholder vote is not surprising to the extent that proposals sponsored by activists have

enjoyed relatively modest voting success in Continental Europe (Cziraki, Renneboog and

Szilagyi, 2010). There are no clear reasons why the three remaining resolutions were rejected.

It appears that the firms proposed a resolution to allow the shareholders to resolve the issue of

multiple voting arrangements.

Interestingly, three companies submitted a proposal for the adoption of double voting

rights (even if unnecessary) that received an average 74.16% support from the shareholders.

We observe that 59 firms (34.10%) chose not to have shareholders vote on an amendment to

their charters of incorporation and, consequently, allowed for the adoption of loyalty shares

automatically from the new French law. do not organize any process of shareholder

consultation. Some of these companies (11 out of 59) publicly announced this decsion (see for

example AEROPORTS DE PARIS in Appendix B), however, the largest part of this group

did not even mention the new regulation.

3.2. Summary statistics

We match our initial data set to annual accounting and financial data (for the fiscal year-

end preceding the annual general meeting) from the Worldscope database.12 The resulting

12 Most French firms have a closing of their financial year in December, and their general meetings are held

in April and May. The April 2 2016 deadline means that, for these firms, 2015 is the latest general meeting in which they could hold a shareholder meeting on the one share – one vote provision. We note that the majority of the companies indeed organized their shareholder votes in the first six months of 2015 (see above). We thus consider 2014 (as of December, 31) as our default date for collecting financial and accounting variables. For the firms with a shareholder vote in 2014, we rely on 2013 accounting and financial information. Our results are robust to the exclusion of these firms as well as to the inclusion of year fixed-effects.

13

merged sample contains 556 observations. The definitions of all variables are reported in the

Appendix C. Accounting and financial variables are winsorized at 0.01 and 0.99 to control for

the possible effect of outliers. In Table 2, Panel A, means (medians) of the firm characteristics

are reported for the full sample and are disaggregated between firms with and without double

voting rights before the adoption of the Florange Act in 2014. Firms whose double voting

rights predate the law are significantly smaller and more profitable than the firms with a one

share - one vote structure during this period. On a univariate basis, they do not differ in terms

of debt, R&D expenses, age and whether they belong to industries with high amenity value

and potential for private benefits extraction. We define these industries following Demsetz

and Lehn (1985) and Bennedsen and Nielsen (2010), and classify media, sport and

entertainment, and advertising as industries with high amenity value.

We also examine whether firms have a dual board structure, which is defined by an

indicator variable set equal to one when the firm has a two-tiered board structure and zero

otherwise. As Table 2 shows 23% of the firms without the loyalty shares have such a structure

while 19% of the firms with loyalty shares have such a structure but the difference between

them is not significant. In order to consider the effects of a U.S. listing we employ an

indicator variable set equal to 1 when the firm appears to be listed on the NYSE or has an

ADR identifier. Again we find no significant difference between the two sets of funds.

We next compare ownership characteristics for the firms that previously issued loyalty

shares and those that did not. We use the share ownership module of Thomson One Banker to

extract the ownership structure of each sample firm. 27 companies are excluded due to

missing values and the matching process leads to a final sample of 529 observations. The

majority of the firms granting double voting rights (61%) are family firms, i.e., closely-held

firms. In contrast, 36% of the firms with the one share – one vote structure are family firms.

In addition, the double voting right firms have a lower percentage of state ownership, less

14

private equity and on average, less institutional investor ownership than the firms without

double voting rights.

In Table 2, Panel B, we focus on the firms that did not have double voting rights before

the Florange Act and we compare the firm characteristics across the firms that after the

Florange Act continued to maintain a one share – one vote structure to those firms choosing to

switch to double voting rights. Consistent with the evidence of differences in firm

characteristics prior to the Act, the firms switching to double voting rights are smaller and

have less institutional investor ownership than the firms maintaining a one share – one vote

structure. In contrast to the evidence regarding firms that had double voting rights before the

Florange Act passed, the firms who adopted them after 2014, are less profitable, have more

state ownership, and more private equity than the firms who maintained their one share – one

vote structure after the passage. They are also younger, on average.

4. Empirical results

4.1. Differences in firm characteristics using double voting rights before the Florange Act

In order to consider the association of firm characteristics with double voting rights

before the enactment of the Florange Act while controlling for other characteristics, we

estimate a binomial logit model in which we also include industry fixed-effects. The results,

presented in Table 3, show that several firm characteristics matter, firm size, leverage, and

age. Specifically, consistent with the univariate results, we find that smaller firms are more

likely to have had double voting rights (the coefficient on the logarithm of total assets is

negative and statistically significant). We also find that the coefficients on leverage and firm

age are positive and significant, suggesting a greater likelihood of double voting rights for

more highly leveraged and older firms. In addition, French-listed firms that also list their

shares in the U.S. are more likely to have adopted loyalty shares prior to 2014.

15

The results also show that the ownership structure of the firm, i.e., the percentage of

capital owned by the largest shareholder, is an important determinant of the likelihood of

shares with double voting rights. This likelihood increases for small blockholders and

decreases for large blockholders, suggesting that large shareholders use double voting rights

to manage thresholds: they can hold a smaller proportion of the capital, yet have the majority

of voting rights.

We then introduce the identity of shareholders. The qualitative variable for family firms

at the 20% threshold receives a positive and statistically significant coefficient, indicating a

greater likelihood that family firms have shares with double voting rights. This result is

consistent with the argument that double voting rights allow blockholders with limited

resources to maintain control of a publicly-traded firm with fewer shares. The coefficient for

the percentage of capital held by the French state is significantly negative, implying that the

likelihood for firms to use double voting rights is smaller for larger stakes held by the state.

Most state stakes result from partial privatizations conducted over the last decades, and the

use of loyalty shares was not planned at the date of the privatization. Finally, the insignificant

coefficient for institutional investor holdings indicates that, once controlling for ownership

structure, the presence of institutions does not change the likelihood of using double voting

rights.

If double voting rights are adopted by the firms’ majority owners to extract private

benefits at the expense of the minority shareholders, then we would expect to see such voting

structures more prevalent in industries in which private benefits are considered more readily

extractable such as the fields of media and entertainment, sports, and advertising, The

negative coefficient for the qualitative variable for firms in these industries traditionally

viewed as having a potential for a private benefits problem, implies that these firms are less

16

likely to adopt double voting rights. This result challenges conventional wisdom that double

voting rights are used by dominant owners to extract private benefits.

Our results imply that small family firms more frequently use voting rights loyalty shares.

These results are in line with the expectation that these firms would be more likely to be

subject to financial constraints. Consequently, they could use double voting rights to loosen

their financial constraints because the double voting rights allow them to hold a smaller

percentage of the shares to keep the company's control.

4.2. Do loyalty shares enhance operational profitability?

In this section, we investigate whether loyalty shares with multiple voting rights are

associted with systematic differences in firm performance from firms without such shares. We

employ a multivariate OLS regression methodology to estimate the relation between a firm’s

return on assets (ROA) and its use of double voting rights. We include a number of firm

characteristics as control variables including firm size, leverage, age, and the R&D/Sales

ratio. The results are reported in Table 4. The first four regression specifications show that

ROA is significantly larger for firms with double voting right shares and that the result

remains even after controlling for the characteristics of ownership. We find that family firms

perform better, whereas state ownership decreases performance.

When we control for firms in industries with the potential for private benefits, we find

that having shares with double voting rights is not directly associated with higher operational

returns. However, we find that firms in industries with potential for private benefits tend to

have lower operating performance, and the existence of double voting right shares mitigates

the negative impact of belonging to these industries.

17

Overall the findings in Table 4 suggest that voting rights loyalty shares are benefitical for

shareholders overall. One explanation for this result that the double voting rights shares

enhance the potential for monitoring by blockholders.

4.3. Loyalty shares and firm value

As is the case for many studies of corporate governance, the examination of the

association between firm performance and a firm characteristic as in the previous section is

susceptible to endogeneity bias. The first bias is reverse causality: firms choosing to grant

loyalty shares to their shareholders may do so because they have better performance than

firms opting for a one share – one vote structure. The second concern is that both profitability

and the adoption of loyalty shares are affected by unobservable factors, thus, influencing both

the dependent and explanatory variables (the omitted variables problem). Rather than

resorting to an instrumental variable approach, for which finding a suitable instrument would

be very difficult if not impossible, we use the introduction of the Florange Act in 2014 as a

natural experiment, and consider how the market reacts to the adoption and the

implementation of the law.

Thus, to identify a causal relationship between the adoption of loyalty shares and firm

value, we take the following approach.13 We examine stock price changes at the date of the

announcement of the agenda of the firm’s first general meeting after the law was adopted, and

examine the impact of the presence of a resolution to maintain the one share – one vote

structure. Firms that announce they have decided to maintain the one share – one vote

structure should have a positive response if shareholders consider the one share – one vote

13 In Appendix A, we provide evidence that the stock price did not signficantly change on the

announcements of several legislative events related to the adoption of the Florange Act. However, such an event study does not allow distinguishing the specific information relative to loyalty shares.

18

structure to be superior and a negative market response if loyalty shares are considered

beneficial.

We extract the notification date for the shareholder meeting agenda that appeared in the

BALO (Bulletin des Annonces Légales Obligatoires). French listed companies are required to

publish in the BALO, at least 30 days before the shareholders meeting, a notice with the text

of the resolutions to be presented at the general meeting by the Board of Directors. Using

Balo publications, we are able to identify companies without double voting rights that submit

a resolution to their general meeting to opt out and maintain their initial one-share one-vote

structure. On closer examination it is clear that for the sample firms, the resolution related to

loyalty shares is the primary item on the agenda, besides the usual resolutions related to

financial statements approval, dividends, and director nomination.

Table 5, Panel A, presents the results of the market reaction at the BALO notification date

for all firms in our sample with a one-share one-vote structure. We compare firms submitting

a resolution to opt out the law and maintain their one-share one-vote structure to firms without

such a resolution (that will adopt the legal loyalty shares regime).

We find that the market reaction is significantly negative for firms submitting a

resolution to maintain a one-share one-vote structure: the mean cumulative abnormal return

for the period (0,+1) is -0.64% (median -0.44%). In contrast, firms that will adopt the new

legal regime are greeted with a significantly positive abnormal reaction: mean CAR(0,+1) =

1.20% (median 0.29%). The difference is statistically significant at the 1% level. These

findings suggest that the adoption of double voting rights is good news for investors.

We then run a multivariate analysis to test whether the positive impact highlighted in the

event study remains after controlling for various characteristics of the firms. Table 5, Panel B

reports parameter estimates in cross-sectional regressions with the individual firm’s abnormal

19

return CAR(0,+1) at the BALO date as the dependent variable. Our results document that

when controlling for several characteristics of the firm (size, ownership), adopting the

automatic double voting rights granting after the Florange Act leads to a 2% increase in

market value, which is economically significant (it represents an average (median) increase of

81 (5.8) million euro around the announcement given the descriptive statistics for the market

capitalization reported in Table 2, panel B). Among the control variables, the coefficient of

the percentage of the capital held by the French state is significantly negative. The positive

impact of the adoption of double voting rights is mitigated for firms with a large stake of state

ownership, perhaps reflecting investors’ doubt on the monitoring efficiency of state

ownership.

The positive effect of double voting rights adoption contributes to the literature on the

effects of control-enhancing devices for firm performance. While several papers document a

negative impact of such devices on value, our findings suggest that when yielding economic

benefits, control-enhancing mechanisms have a positive impact on firm value. Further, the

granting of double voting rights, in contrast to dual class share or pyramids, represents a

transparent mechanism with effects that could benefit all shareholders, which may help

explain the investors’ positive assessment. Our findings also contribute to the literature on

long-term shareholders. Assessing the impact of long term shareholders on firm value is a

difficult task, and most papers rather investigate firm’s financial decisions. The

implementation of loyalty shares offers an opportunity to measure the direct impact of

encouraging long-term shareholding on firm value.

4.4. Which firms adopt the legal double voting rights regime after the Florange Act?

Our previous results suggest that double voting rights loyalty shares can have a positive

effect on the firm’s profitability and result in a positive market reaction around the

20

shareholder’s invitation to the general meeting for those firms with a prior one share – one

vote structure that adopt the new mandatory voting arrangement. These findings suggest that,

before the law, shareholders have a positive perception of double voting rights loyalty shares.

This section addresses the question of the comparability of firms with double voting

rights shares before the law and firms adopting the legal regime after the law. Logit

regressions in Table 6 assess the likelihood for a firm with a one share – one vote structure to

adopt double voting rights after the Florange law (columns 1 and 2). Ownership variables are

the main determinants of the likelihood to adopt the legal regime. The significantly positive

coefficient for the percentage of the capital held by the French state reflects the fact that one

of the reasons to implement the automatic double voting rights regime was precisely to allow

the state to sell shares in the owned companies without reducing its control rights. An

estimate of the funds from the sale of shares to maintain the same percentage of voting rights

amounted to 15 billion euros at the end of December 2014.14 Given the large budget deficit

and the level of debt of the French state in 2014, this motivation for the adoption of double

voting rights may be related to the existence of financial constraints, already documented for

other types of blockholders such as families. The percentage of capital held by hedge funds

also shows a positive coefficient. These activist shareholders may benefit from getting double

voting rights to gain power and be able to implement their strategies more easily. In contrast,

institutional investors have a negative impact on the likelihood of switching to double voting

rights. Two reasons may explain the rejection of double voting rights by institutional

investors. First, they have widely advocated the superiority of one-share one-vote structures to

ensure equal treatment of all investors. Second, to get double voting rights in France,

shareholders have to be registered, which professional investors find difficult to implement.

14 Source: http://www.lejdd.fr/Economie/La-grande-braderie-de-l-Etat-rendue-possible-grace-a-la-Loi-

Florange-700814

21

Table 6, columns 3 and 4, compares former adopters and new adopters of double voting

rights shares. The results confirm the previous ones for the French state, hedge funds and

institutional investors. Further, they document that new adopters are less often family firms

than was the case previously. In contrast to our results in Section 4.1., the likelihood of

adopting double voting rights is larger for firms in industries with a potential for private

benefits, which may be due to the willingness of shareholders of these firms to increase their

monitoring ability.

In Table 3, we find that when firms voluntary choose double voting shares, the

probability to do it is lower in these industries. After the law, the probability increases with

private benefits. You comment this result page 20 "willingness of shareholders to increase

their monitoring ability". They could have done it before the law, but we could insist on the

fact that it is much easier for them to do it after the law (just do nothing), whereas before the

law, there were debates, some shareholders' associations being opposed.

5. Conclusions

In this paper, we analyze the determinants of the use of loyalty shares by examining the

case of double voting rights shares in France. We use the adoption of the Florange law in

2014 that provides for firms to automatically grant double voting rights to registered

shareholders who have held the shares for at least two years. We find that before Florange

Act, small family firms were the main firms with the voting rights loyalty shares. We also

find an association between a firm’s operating performance and the existence of the voting

rights loyalty shares. the firms had a positive impact on their profitability. Further evidence of

the valuation effects of loyalty shares comes from an analysis of the market reaction at the

adoption of automatic double voting rights after the adoption of Florange Act. We find a

positive reaction, even if firms subject to the law (those who have decided not to opt out the

22

provisions of the law) differ from those that voluntarily adopted double voting rights before

the law. Our findings suggest that voting rights loyalty shares enhance blockholders

monitoring, and allows financially constrained shareholders to retain control and reduce

economic ownership.

23

References

Adams, R., Ferreira, D., 2007. One Share-One Vote: The Empirical Evidence. Review of

Finance 12, 51–91.

Albuquerque, R., Schroth, E., 2010. Quantifying private benefits of control from a structural

model of block trades. Journal of Financial Economics 96, 33–55.

Anderson, R.C., Reeb, D.M., 2003. Founding-Family Ownership and Firm Performance:

Evidence from the S&P 500. The Journal of Finance 58, 1301–1328.

Ang, J.S., Megginson, W.L., 1989. Restricted Voting Shares, Ownership Structure, And The

Market Value Of Dual-Class Firms. Journal of Financial Research 12, 301–318.

Asker, J., Farre-Mensa, J., Ljungqvist, A., 2015. Corporate Investment and Stock Market

Listing: A Puzzle? Review of Financial Studies 28, 342–390.

Barrot, J.-N., 2016. Investor Horizon and the Life Cycle of Innovative Firms: Evidence from

Venture Capital. Management Science.

Bauguess, S.W., Slovin, M.B., Sushka, M.E., 2012. Large shareholder diversification,

corporate risk taking, and the benefits of changing to differential voting rights. Journal

of Banking & Finance 36, 1244–1253.

Bennedsen, M., Nielsen, K.M., 2010. Incentive and entrenchment effects in European

ownership. Journal of Banking & Finance 34, 2212–2229.

Bolton, P., Samama, F., 2013. Loyalty-Shares: Rewarding Long-term Investors. Journal of

Applied Corporate Finance 25, 86–97. doi:10.1111/jacf.12033

Brochet, F., Loumioti, M., Serafeim, G., 2015. Speaking of the short-term: disclosure horizon

and managerial myopia. Review of Accounting Studies 20, 1122–1163.

Burkart, M., Lee, S., 2007. One Share - One Vote: the Theory. Review of Finance 12, 1–49.

Bushee, B.J., 1998. The Influence of Institutional Investors on Myopic R&D Investment

Behavior. The Accounting Review 73, 305–333.

Chen, X., Harford, J., Li, K., 2007. Monitoring: Which institutions matter? Journal of

Financial Economics 86, 279–305.

Claessens, S., Djankov, S., Joseph P. H. Fan, Larry H. P. Lang, 2002. Disentangling the

Incentive and Entrenchment Effects of Large Shareholdings. The Journal of Finance

57, 2741–2771.

Cziraki, P., Renneboog, L., Szilagyi, P.G., 2010. Shareholder Activism through Proxy

Proposals: The European Perspective: Shareholder Activism through Proxy Proposals.

24

European Financial Management 16, 738–777.

Demsetz, H., Lehn, K., 1985. The Structure of Corporate Ownership: Causes and

Consequences. Journal of Political Economy 93, 1155–1177.

Derrien, F., Kecskés, A., Thesmar, D., 2013. Investor Horizons and Corporate Policies.

Journal of Financial and Quantitative Analysis 48, 1755–1780.

Dimitrov, V., Jain, P.C., 2006. Recapitalization of one class of common stock into dual-class:

Growth and long-run stock returns. Journal of Corporate Finance 12, 342–366.

Edmans, A., 2009. Blockholder Trading, Market Efficiency, and Managerial Myopia. The

Journal of Finance 64, 2481–2513

Edmans, A., 2014. Blockholders and Corporate Governance. Annual Review of Financial

Economics 6, 23–50. Fried, J.M., 2015, The Uneasy Case for Favoring Long-Term Shareholders, Yale Law Journal

124. Gaspar, J.-M., Massa, M., Matos, P., Patgiri, R., Rehman, Z., 2013. Payout Policy Choices

and Shareholder Investment Horizons. Review of Finance 17, 261–320.

Ginglinger, E., Hamon, J., 2012. Ownership, control and market liquidity. Finance 33, 61–99.

Gompers, P.A., Ishii, J., Metrick, A., 2010. Extreme Governance: An Analysis of Dual-Class

Firms in the United States. Review of Financial Studies 23, 1051–1088.

Graham, J.R., Harvey, C.R., Rajgopal, S., 2005. The economic implications of corporate

financial reporting. Journal of Accounting and Economics 40, 3–73.

Harford, J., Kecskes, A., Mansi, S., 2014. Do Long-Term Investors Improve Corporate

Decision Making? SSRN Electronic Journal.

Holderness, C.G., Sheehan, D.P., 1988. The role of majority shareholders in publicly held

corporations. Journal of Financial Economics 20, 317–346.

Jarrell, G.A., Poulsen, A.B., 1988. Dual-class recapitalizations as antitakeover mechanisms.

Journal of Financial Economics 20, 129–152.

Masulis, R.W., Pham, P.K., Zein, J., 2011. Family Business Groups around the World:

Financing Advantages, Control Motivations, and Organizational Choices. Review of

Financial Studies 24, 3556–3600.

Maury, B., Pajuste, A., 2005. Multiple large shareholders and firm value. Journal of Banking

& Finance 29, 1813–1834.

Miller, M.H., Modigliani, F., 1961. Dividend Policy, Growth, and the Valuation of Shares.

The Journal of Business 34, 411–433.

Partch, M.M., 1987. The creation of a class of limited voting common stock and shareholder

25

wealth. Journal of Financial Economics 18, 313–339.

Villalonga, B., Amit, R., 2009. How Are U.S. Family Firms Controlled? Review of Financial

Studies 22, 3047–3091

Villalonga, B., Amit, R., 2006. How do family ownership, control and management affect

firm value? Journal of Financial Economics 80, 385–417.

26

Appendix A: Institutional Details of the French Loyalty Shares

France is an ideal laboratory to study loyalty shares, as they are widely used by French firms. Since

1966, the firm’s charter can authorise double voting rights for registered shares that have been held

for more than x years (where x is between 2 and 4 years). Like all decisions amending a firm’s

charter, introducing or deleting double voting right shares requires an extraordinary general meeting

with a two-thirds majority vote by shareholders to be adopted. In contrast to dual-class shares, the

voting right is attached to the shareholder and double voting right shares and single voting right

shares trade at the same price and on the same trading line. When a double voting right share is

sold, it loses the second voting right. Double voting rights shares are used by two-thirds of the listed

French firms. The Florange law (LOI n° 2014-384 du 29 mars 2014 visant à reconquérir l'économie

réelle) requires that all companies listed on a regulated market adopt the double voting rights unless

they reach a decision through an extraordinary general meeting tin whicaken by a majority of 2/3 of

the votes subsequent to April 2, 2014. (The law remains optional for companies not listed on an

exchange.)

The statutory provisions granting double voting rights that existed prior to 2 April 2014 continue to

apply without modification except that now the double voting right is open to all citizens regardless

of their nationality (and not only to French nationals or EU). In companies listed on a regulated

market that had not established a double voting right before the entry into force of the law Florange

(2 April 2014), the calculation of the period of two years starts April 2, 2014. The double voting

rights would then be automatically earned on shares of these companies as of April 3, 2016,

provided that the shares have been held continuously in registered form by the same shareholder

during this period. These companies had until April 2, 2016 to submit a special general meeting to

amend their articles to remove the legal regime of the double voting right.1 Interestingly, all French

companies are concerned (headquarters in France) even if they are listed in another country.

1 In Italy, a 2014 law introduced a similar mechanism (double voting rights after two years holdings). In 2014, the

firms would opt out at the general meetings with a 50% majority. From 2015, a supermajority of 2/3 has to be reached.

27

The differential rights offered by loyalty shares can be voting rights, bonus dividend, bonus shares

or warrants. Bolton and Samama (2013) favor warrants rewards and call this mechanism L-shares.

A loyalty warrant would be granted to all shareholders, and would vest only after the expiration of a

pre-determined loyalty period. The warrant attached to the L-share is not transferable during the

loyalty period. Bolton and Samama (2013) cite the case of Michelin, who offered free warrants to

its shareholders in December 1991, as well as a bonus warrant with the same characteristics. The

bonus warrant could be exercised only by the shareholders holding the share for two years and who

did exercise the initial free warrant.

As part of their privatization process, several firms offered bonus shares. In 1987, Compagnie

Financière de Suez (France) offered a free share to any investor who bought 10 shares if the shares

were held for at least 18 months. In 2009, Australia's Queensland Rail gave any investors who

bought 15 shares one-share bonus if they held the share for at least one year.

Even if they are much less frequent than voting rights loyalty shares, dividend bonus shares are also

used in France, having been introduced by a law passed July 12, 1994. Firms have to amend their

charter to be allowed to propose a dividend bonus of maximum 10% to shareholders registered for

two years. The shares entitled to bonus are limited to 0.5% of the capital for each shareholder. The

same bonus can be granted for stock dividends.

Although loyalty shares have been widely used in France, the loyalty shares (especially ones with a

dividend bonus) are rarely used in other countries, even when legally possible. One reason may be

the risk of being sued by shareholders. In 2007, Royal DSM, a Dutch company announced a

dividend bonus of 10% per year, after three years of registered shares holding. However, the U.S.

asset manager Franklin Templeton Investments sued, claiming discrimination against shareholders.

Despite the Supreme Court of Netherlands confirming a firm’s right to offer loyalty shares, Royal

DSM withdrew its proposal, unwilling to stand in court against its shareholders.

28

Reaction to the announcement of the Florange Act

The Florange law became effective in April 2014. However, it had been widely discussed for

several months before that date. We identify four central dates that should have been accompanied

by a market reaction if there were valuation effects:

• April 30, 2013: the French press evokes the discussion around the Florange Act and

mentions that it will soon be examined by the French parliament (National Assembly).

• September 18, 2013: the Florange project is scrutinized by the National Assembly.

• February 24, 2014: the Florange project is scrutinized by the National Assembly and is

finally adopted.

• April 2, 2014: the legislative act is published in the Official Journal of the French

Republic.

We measure market reaction using the market model adjusted stock return around the

announcement date. The market model parameters are estimated over the 150-day period from

event day -160 to event day -11. The CAC All Shares index is used to compute daily market returns.

We calculate cumulative abnormal returns (CARs) over the 2-day period [0,+1], where 0 is the

announcement date.

We test for the difference in means and medians between firms that already have shares with

double voting rights, and firms with a one share – one vote structure. We do not observe any

significant difference between the subsamples. This lack of reaction can be explained by the fact

that the Florange law, besides the generalization of double voting rights, contained several other

provisions. Another explanation related to the fact that at the date of the adoption of the law,

investors do not know whether firms will opt out and remain with a one share – one vote structure

or switch to the new legal regime of automatic double voting rights.

29

Appendix B: Examples of Firms Making Choices After Florange Act

Air Liquide: Proposal to maintain the one share – one vote principle Source: Invitation to shareholders’ meeting of May 6, 2015 Resolution 14: Amendment to article 8 of the articles of association relating to voting rights. The law dated March 29, 2014 (the “loi Florange”) automatically confers double voting rights to all shares that have been registered continuously for at least two years in a company with shares listed on a regulated market, thus reversing the previous legal scheme. This new scheme can be voted down through statutory means to return to the “one share one vote” principle. The amendment to the articles of association that you are asked to approve in the 14th resolution falls within this context. This affirmation of shareholder equality is in line with the principles that your Company has supported for more than 20 years. The Shareholders’ Meeting of May 19, 1993 removed double voting rights from the Company’s articles of association in order to avoid, in particular, significant shareholders holding disproportionate power compared with the percentage of shares they held, and therefore the funds that they had invested. Eiffage: Proposal to introduce double voting rights in the articles of association Source: Annual report 2014 - resolutions that will be put to the vote at the Ordinary and Extraordinary General Meeting convened on 15 April 2015. The General Meeting is invited to authorise changes to bring the Memorandum and Articles of Association in line with […] Article L.225-123 of the French Commercial Code as amended, dealing with voting rights, and accordingly amend Article 30 of Memorandum and Articles of Association. As required by law, all fully paid-up shares that have been registered in the name of the same shareholder for at least two years from the date Act 2014-384 of 29 March 2014 (‘Florange Act’) came into force will have double voting rights. Aéroports de Paris: No proposal put to vote Source: Notice of Meeting – Ordinary general meeting, 18 May 2015, Report from the Board of Directors. Given the specificities of Aéroports de Paris and the particular role played by the French State in the affairs of Aéroports de Paris, it is estimated that the fact that Aéroports de Paris’ shares are able to enjoy dual voting rights when they satisfy the requirements of article L. 225-123 of the French Commercial Code will preserve and strengthen the vital involvement of the French State and promote the involvement of shareholders in the life of the company. As a result, it has been decided that there will be no amendment to the articles of association to block application of the dual voting right stipulated by article L. 225-123 of the French Commercial Code.

30

Appendix C – Variable index: Definitions

Variable Definition Ownership variables Adopt double voting Indicator variable set equal to one when the company does not put forward a

proposal for rejecting the double voting system, and zero otherwise. (source: authors’ database)

Double voting Indicator variable set equal to one when the firm’s corporate charter confers double voting rights to all shares that have been registered continuously for a minimum number of years. (source: authors’ database)

Family firm Indicator variable set equal to one when the largest shareholder owns at least 20% of the shares and this largest owner is a family. (Source: Thomson One Banker)

French state % Equity stake of the French state (in percent). (Source: Thomson One banker) Hedge funds % Aggregated equity stake of hedge funds (in percent). (Source: Thomson One

Banker) Institutional % Aggregated equity stake of institutional investors (in percent). (Source: Thomson

One Banker) Private equity % Aggregated equity stake of private equity funds. (Source: Thomson One Banker) CFR% lgst block Direct cash flow rights of the largest owner (in percent). (Source: annual reports) Dual board Indicator variable that is set equal to one when the firm has a two-tiered board

structure US listing Indicator variable set equal to 1 when the firm appears to be listed on the NYSE or

has an ADR identifier (Source: Worldscope) Firm’s characteristics

Age Number of years since firm’s initial public offering (IPO). (Source: annual reports)

Assets Total assets at the end of the fiscal year (in millions of euros). (Source: Worldscope).

Debt/Assets Ratio (financial debts / total assets). (Source: Worldscope) Industry dummies Indicator variables, based on the one-digit standard industrial classification (SIC)

code. (Source: Worldscope) Ln(Age) Ln(number of years since firm’s IPO + 1). (Source: annual reports) Log(Assets) Log (Assets). (Source: Worldscope) Log(Market cap) Log (Market Cap). (Source: Datastream) Market cap Market capitalization before the general meeting. (Source: Datastream) Private benefits industry

Indicator variable that equals one when the firm belongs to a sector that is characterized by high amenity value [as defined by Bennedsen and Nielsen (2010)]. (Source: Worldscope)

R&D/Sales R&D expenses / net sales. (Source: Worldscope) ROA Return on assets, computed as the ratio of operating income to total assets.

(Source: Worldscope).

31

Table 1 – Post Florange Act general meetings This table describes the resolutions that were put to vote in a sample of 173 French listed companies whose charters of incorporation did not include double voting provisions before the enactment of the Florange Act. It also reports the mean and median approbation rates (% in favor).

Number % in favor Mean Median Proposal to maintain the one share - one vote principle 111 94.44% 99.86%

The resolution passes 102 98.53% 99.92% The resolution fails to pass the shareholder vote 9 42.85% 46.68%

Proposal to introduce double voting rights in the articles of association 3 74.16% 75.41% No proposal put to vote 59 - -

32

Table 2 – Descriptive statistics of sample firms The sample consists of 556 French listed firms with non-missing financial and accounting data. This initial sample is matched with the share ownership module of Thomson One banker, which reduces the sample size to 529 firms. This table reports means, medians, standard deviations, and tests of differences in means and medians. In Panel A, we split the global sample according to whether the firm’s corporate charters confer double voting rights before the Florange Act enactment. In Panel B, we focus on the subsample of firms that did not have multiple voting rights before the Florange Act. We split this subsample according to whether the company puts forward a proposal for maintaining the one share – one vote principle. All accounting and financial variables are winsorized at 0.01 and 0.99. Variable definitions are in Appendix C. Student T–statistics test for the difference in means. Wilcoxon z-statistics test for the difference in medians. St. Dev is the standard deviation. Asterisks denote statistical significance based on two-sided tests at the 1% (***), 5% (**) and 10% (*) level. Panel A: Double voting in French listed firms before the Florange Act

Sample Double voting = 0 Double voting = 1 Test for. differences Variable Mean Median St. Dev Mean Median Mean Median t-test Sig. z-test Sig. Firm characteristics Observations n=556 n=168 n=388 Assets 9438.41 209.27 44566.61 18373.88 416.14 5569.45 184.21 3.14 *** 2.84 *** Log(Assets) 2.50 2.32 1.10 2.74 2.62 2.39 2.27 3.42 *** 2.84 *** Debt/Assets 0.21 0.19 0.17 0.21 0.18 0.21 0.19 -0.03 -0.94 R&D/Sales 0.10 0.00 0.57 0.14 0.00 0.09 0.00 0.85 0.85 Age 19.23 16.00 15.81 19.34 16.00 19.19 16.00 0.11 -0.27 Ln(Age) 2.70 2.83 0.88 2.64 2.83 2.73 2.83 -1.17 -0.27 ROA 0.00 0.03 0.14 -0.02 0.02 0.01 0.03 -1.88 * -2.83 *** Private benefits industry 0.05 0.00 0.22 0.05 0.00 0.05 0.00 -0.07 -0.07 Dual board structure 0.21 0.00 0.40 0.23 0.00 0.19 0.00 1.04 1.04 US listing 0.07 0.00 0.26 0.06 0.00 0.08 0.00 -0.84 -0.84 Ownership structure Observations n=529 n=160 n=369 CFR% lgst block 44.78 45.35 25.99 41.94 35.15 46.02 49.61 -1.66 * -1.96 ** Family firm 0.54 1.00 0.50 0.36 0.00 0.61 1.00 -5.43 *** -5.29 *** French state % 2.02 0.00 7.92 4.46 0.00 0.96 0.00 4.76 *** 4.10 *** Private equity % 5.20 0.00 14.19 6.91 0.00 4.45 0.00 1.83 * 2.71 *** Hedge funds % 0.21 0.00 1.61 0.33 0.00 0.15 0.00 1.17 1.00 Institutional % 11.27 7.02 12.87 13.34 7.65 10.37 6.86 2.45 ** 1.23

33

Panel B: French listed firms with one share – one vote before the Florange Act

Sample Maintain one share /

one vote Switch to double

voting rights Test for. differences Variable Mean Median St. Dev Mean Median Mean Median t-test Sig. z-test Sig. Firm characteristics Observations n=168 n=108 n=60 Assets 18373.88 416.14 65863.18 21045.01 911.11 13565.83 69.96 0.70 3.81 *** Log(Assets) 2.74 2.62 1.23 2.98 2.96 2.29 1.84 3.59 *** 3.81 *** Market cap. 4086.79 290.83 10659.66 5194.47 513.72 2092.97 71.27 1.82 * 3.33 *** Log(Market cap) 2.51 2.46 1.09 2.72 2.71 2.14 1.85 3.41 *** 3.33 *** Debt/Assets 0.21 0.18 0.20 0.25 0.24 0.14 0.09 3.70 *** 3.40 *** R&D/Sales 0.14 0.00 0.65 0.11 0.00 0.18 0.00 -0.60 1.22 Age 19.34 16.00 16.76 20.26 17.50 17.68 15.00 0.95 2.18 ** Ln(Age) 2.64 2.83 1.00 2.75 2.92 2.45 2.77 1.88 * 2.18 ** ROA -0.02 0.02 0.14 0.01 0.03 -0.06 0.00 3.26 *** 3.21 *** Private benefits industry 0.05 0.00 0.21 0.03 0.00 0.08 0.00 -1.62 -1.62 Dual board structure 0.23 0.00 0.42 0.27 0.00 0.17 0.00 1.50 1.49 US listing 0.06 0.00 0.24 0.08 0.00 0.02 0.00 1.76 * 1.75 * Ownership structure Observations n=160 n=107 n=53 CFR% lgst block 41.94 35.15 27.92 40.45 33.70 44.93 36.69 -0.95 -0.70 Family firm 0.36 0.00 0.48 0.36 0.00 0.38 0.00 -0.27 -0.27 French state % 4.46 0.00 12.81 3.12 0.00 7.16 0.00 -1.89 * -0.91 Private equity % 6.91 0.00 15.24 4.95 0.00 10.86 0.00 -2.34 ** -2.39 ** Hedge funds % 0.33 0.00 2.29 0.26 0.00 0.48 0.00 -0.58 -0.57 Institutional % 13.34 7.65 15.18 16.70 13.25 6.55 2.53 4.18 *** 3.96 ***

34

Table 3 – Voluntary choice of double voting rights This table presents a logit regression analysis for the existence of a firms having voluntary double voting rights prior to the Florange Act. The dependent variable equals one when the firm’s corporate charters confer double voting rights to all shares that have been registered continuously for a minimum number of years. Sector (1-digit SIC code) dummies are included in the regressions but are not reported. All accounting and financial variables are winsorized at 0.01 and 0.99. Variable definitions are in Appendix C. z-statistics are reported in parentheses. Asterisks denote statistical significance at the 1% (***), 5% (**), or 10% (*) level, respectively. (1) (2) (3) (4) (5) (6) (7)

Double voting

Double voting

Double voting

Double voting

Double voting

Double voting

Double voting

Log(Assets) -0.428*** -0.421*** -0.343** -0.359** -0.438*** -0.421*** -0.351** (-3.33) (-3.37) (-2.51) (-2.31) (-3.59) (-3.36) (-2.26) Debt/Assets 1.521** 1.304** 1.321** 1.366** 1.456** 1.377** 1.407** (2.35) (2.02) (2.03) (2.08) (2.35) (2.11) (2.12) R&D/Sales -0.184 -0.194 -0.042 0.030 -0.235 -0.210 0.008 (-1.14) (-1.13) (-0.24) (0.18) (-1.50) (-1.22) (0.05) Ln(Age) 0.353** 0.373*** 0.327** 0.286* 0.351** 0.362** 0.272* (2.44) (2.60) (2.19) (1.82) (2.45) (2.53) (1.74) Dual board -0.225 -0.225 -0.335 -0.326 -0.238 -0.204 -0.305 (-0.90) (-0.89) (-1.31) (-1.25) (-0.98) (-0.81) (-1.17) US listing 1.123** 1.415*** 1.382*** 1.452*** 0.900** 1.476*** 1.496*** (2.51) (3.03) (3.03) (3.15) (2.10) (3.12) (3.27) CFR% lgst block 0.957** 6.658*** 6.623*** (2.02) (4.16) (4.10) CFR% lgst block_squared -5.894*** -5.800*** (-3.71) (-3.62) Family firm 1.009*** 0.944*** 0.942*** (4.42) (3.84) (3.81) French state % -5.244** -5.131** -5.228** (-2.29) (-2.27) (-2.26) Private equity % -0.604 -0.683 (-0.72) (-0.80) Hedge funds % -8.904* -7.582 (-1.69) (-1.40) Institutional % -0.065 -0.190 (-0.07) (-0.19) Private benefits industry -0.950** -0.987* -1.017* (-1.98) (-1.75) (-1.80) Constant -0.418 -1.356* -0.293 -0.077 0.183 -1.364* -0.051 (-0.58) (-1.82) (-0.41) (-0.10) (0.28) (-1.83) (-0.07) Industry dummies Y Y Y Y Y Y Y Observations 529 529 529 529 556 529 529 Pseudo R-squared 0.124 0.144 0.166 0.170 0.115 0.149 0.175

35

Table 4 – The association of double voting rights shares with firm operating performance This table presents a multivariate regression analysis in which the dependent variable is the return on assets (ROA). Sector (1-digit SIC code) dummies are included in the regressions but are not reported. All accounting and financial variables are winsorized at 0.01 and 0.99. Variable definitions are in Appendix C. T–statistics are reported in parentheses and asterisks denote statistical significance at the 1% (***), 5% (**), or 10% (*) level.

(1) (2) (3) (4) (5) ROA ROA ROA ROA ROA Double voting rights shares indicator 0.028** 0.027** 0.021* 0.020* 0.017 (2.56) (2.45) (1.90) (1.83) (1.45) CFR% lgst block 0.084*** (4.26) Family firm 0.025*** 0.024** 0.026*** (2.68) (2.47) (2.83) French state % -0.146*** -0.134*** -0.150*** (-3.40) (-3.10) (-3.47) Private equity % -0.070 (-1.31) Hedge funds % -0.083 (-0.13) Institutional % 0.073** (2.11) Private benefits industry -0.054** (-2.30) Double voting * Private benefits industry 0.080** (2.42) Log(Assets) 0.036*** 0.040*** 0.040*** 0.034*** 0.041*** (6.32) (7.17) (7.35) (5.54) (7.42) Debt/Assets -0.105*** -0.083** -0.097*** -0.097*** -0.099*** (-2.64) (-2.50) (-2.90) (-2.96) (-3.00) R&D/Sales -0.077*** -0.070*** -0.070*** -0.068*** -0.070*** (-6.15) (-5.36) (-5.44) (-5.03) (-5.44) Ln(Age) 0.028*** 0.026*** 0.027*** 0.024*** 0.027*** (3.39) (3.28) (3.39) (3.28) (3.41) Constant -0.169*** -0.212*** -0.168*** -0.148*** -0.168*** (-5.14) (-6.43) (-5.10) (-4.44) (-5.10) Industry dummies Y Y Y Y Y Observations 556 529 529 529 529 R-squared 0.350 0.403 0.394 0.402 0.398 Adjusted R-squared 0.336 0.388 0.378 0.382 0.379

36

Table 5 – Cumulative abnormal returns around firms’ choices regarding double voting right shares after the Florange Act The sample consists of French-listed companies without double voting rights before the Florange Act. Although this act generalizes double voting rights, sample firms can bring a proposal to the general shareholder meeting to maintain the one share-one vote principle. The 2-day cumulative abnormal return (winsorized at 0.01 and 0.99) is measured around the notification that appeared in the Bulletin des Annonces Légales Obligatoires (BALO). Panel A reports descriptive statistics for the dependent variable according to whether the firm maintained the one share-one vote or switched to double voting. The table also reports difference tests based on a t-test for equality in means and a Wilcoxon-test for equality of medians. Median values are in italic. Asterisks denote statistical significance at the 1% (***), 5% (**), or 10% (*) level, respectively. Panel B presents results from regressing the 2-day cumulative abnormal return on ownership and financial characteristics. Sector (1-digit SIC code) dummies are included in the regressions but are not reported. All accounting and financial variables are winsorized at 0.01 and 0.99. Variable definitions are in Appendix B. In parentheses are t-statistics based on standard errors adjusted for heteroskedasticity. Asterisks denote statistical significance at the 1% (***), 5% (**), or 10% (*) level, respectively. Panel A

All Maintain one share

/ one vote Switch to double

voting Test for differences n = 154 100 54

CAR [0,+1] 0.01% -0.64% ** 1.20% ** -3.63 *** -0.20% -0.44% *** 0.29% *** -3.28 ***

37

Panel B (1) (2) (3) (4) (5) (6) CAR[0,+1] CAR[0,+1] CAR[0,+1] CAR[0,+1] CAR[0,+1] CAR[0,+1] Adopt double voting 0.020*** 0.021*** 0.021*** 0.022*** 0.023*** 0.024*** (3.45) (3.55) (3.46) (3.54) (3.40) (2.87) CFR% lgst block -0.010 -0.032 (-1.18) (-0.81) CFR% lgst block_squared 0.023 (0.61) Family firm -0.008 -0.007 -0.007 (-1.41) (-1.15) (-0.93) French state % -0.026** -0.026* -0.007 (-2.30) (-1.94) (-0.45) Private equity % 0.008 (0.34) Hedge funds % -0.035 (-0.51) Institutional % 0.013 (0.74) Adopt double voting * Family firm -0.003 (-0.20) Adopt double voting * French state % -0.027 (-1.16) Log(Market cap) 0.001 0.000 0.000 0.001 0.001 0.001 (0.23) (0.12) (0.06) (0.32) (0.18) (0.34) Constant -0.006 -0.000 0.004 -0.002 -0.004 -0.003 (-0.31) (-0.01) (0.20) (-0.12) (-0.20) (-0.17) Industry dummies Y Y Y Y Y Y Observations 154 149 149 149 149 149 R-squared 0.128 0.143 0.144 0.155 0.159 0.158 Adjusted R-squared 0.074 0.081 0.076 0.087 0.071 0.076

38

Table 6: The choice of adopting the double voting system This table presents a logit regression analysis. In columns (1) and (2) we examine the choice of adopting the double voting system after the Florange Act. The sample consists of 160 French listed companies without double voting right shares before the Florange Act. The dependent variable (Adopt double voting) is set equal to one when the firm decides not to put a proposal to maintain the one share – one vote principle at its general meeting. In columns (3) and (4). we investigate whether the firms that adopt double voting shares after the act differ from those having it in force before the act’s enactment. The dependent variable (New adopter) is set equal to one when the firm has a one share – one vote structure before the Florange Act and decides not to put a proposal to maintain the one share – one vote principle. The sample consists of 422 French listed companies with double voting arrangement after the Florange Act (among which 53 are new adopters).

Sector (1-digit SIC code) dummies are included in the regressions but are not reported. All accounting and financial variables are winsorized at 0.01 and 0.99. Variable definitions are in Appendix B. z-statistics are reported in parentheses. Asterisks denote statistical significance at the 1% (***). 5% (**). or 10% (*) level. respectively.

(1) (2) (3) (4)

Adopt double voting

Adopt double voting

New adopter

New adopter

CFR% lgst block -2.586 -6.616*** (-0.85) (-2.67) CFR% lgst block_squared 3.567 6.090** (1.21) (2.50) Family -0.135 -0.727* (-0.30) (-1.95) French state % 3.865** 5.779** (2.07) (2.43) Private equity % -0.429 0.709 (-0.25) (0.66) Hedge funds % 16.135* 15.276** (1.80) (2.33) Institutional % -8.304*** -4.972* (-3.04) (-1.79) Private benefits industry 1.775* 1.780* 1.656** 1.516** (1.72) (1.75) (2.10) (2.01) Log(Assets) -0.178 0.027 0.217 0.278 (-0.79) (0.14) (1.08) (1.04) Debt/Assets -2.152* -3.022** -3.669*** -3.571*** (-1.68) (-2.35) (-3.34) (-3.18) R&D/Sales -0.106 -0.289 0.073 -0.045 (-0.35) (-0.86) (0.36) (-0.21) Ln(Age) -0.176 -0.134 -0.472** -0.330 (-0.75) (-0.46) (-2.26) (-1.46) Dual board -0.721 -0.699 -0.074 -0.119 (-1.41) (-1.27) (-0.17) (-0.25) US listing -1.125 -0.603 -2.273** -1.751 (-0.85) (-0.34) (-2.21) (-1.50) Constant 1.933 2.080* 2.028* 0.519 (1.61) (1.83) (1.80) (0.50) Industry dummies Y Y Y Y Observations 160 160 422 422 Pseudo R-squared 0.181 0.274 0.165 0.217