Security Voting Structure and Firm Value: Synthesis and New Insights from Emerging Markets

Abstract

The value of vote hypothesis states that the value of differential voting rights reflects the value of private benefits of control enjoyed by controlling shareholders with superior voting rights at the expense of minority shareholders with lower voting rights. Although the extant evidence is generally consistent with this hypothesis, it is inconclusive, and based mainly on studies in developed economies. We first synthesize the evidence on this issue in the emerging economies. Next, we provide new insight on this subject with description and analysis of a proposed regulatory change for removal of the 10 % voting cap in the banking sector in India in 2005. We hypothesize that removal of the voting cap would increase the probability of a takeover and induce positive value gain for banks that the proposal relates to. Consistent with our prediction, we observe significant abnormal returns of 7.8 % for private Indian banks over the 2-day interval surrounding the announcement. Cross-sectional analyses further reveal that the valuation gain is inversely proportional to the bank’s foreign and insider ownership. This study makes important contributions to the growing literature on the valuation impact and efficiency gains of liberalization of foreign ownership restrictions in emerging markets.