The article “Corporate Payouts in Dual Classes” by Lei, Li, and Yu analyze the effect of payout decisions, including dividend payments and share repurchases, on dual-class firms. These firms imply two classes of shares, where insiders are given access to superior shares with control and voting rights, while the general public can purchase inferior shares that do not have these rights. The article demonstrates that the two corporate payouts are useful for dual-class firms if they use these options adequately.
To begin with, Lei, Li, and Yu emphasize the differences between dividend payments and share repurchases. On the one hand, dividend payments allow mitigating agency problems because they reduce the firm’s free cash flow. On the other hand, share repurchases can mitigate and exacerbate agency problems because they reduce the free cash flow and serve as an anti-takeover mechanism. That is why the study has selected a sample of 135 dual-class firms to determine how they use the two payout decisions together.
Lei, Li, and Yu have arrived at significant and relevant conclusions. Firstly, when dual-class firms need to mitigate their agency problems, they use dividend payments. Secondly, share repurchases are used when it is necessary to maintain the private benefits of control. This result is achieved because these firms repurchase their superior voting shares. Since this process results in more agency problems, the firms pay dividends in both superior and inferior classes to mitigate them. Consequently, such firms have different motivations to use each of the payout decisions. This information denotes that dual-class firms do not use share repurchases and dividend payments as simple substitutes. Instead of it, the firms balance these two options to mitigate agency problems and maintain the private benefits of control.
References
Lei, A. Y., Li, H., & Yu, J. (2019). Corporate payouts in dual classes. Managerial Finance, 45(12), 1542–1562. Web.