REALLOCATION OF VOTING-RIGHTS AND SHAREHOLDERS WEALTH

Theory suggests that reorganizing common shares into shares with different voting rights may reduce the effectiveness of corporate control mechanism, decreasing firm value. Firms argue that creating a class of restricted (non-voting or subordinate voting) equity may enhance firm value by improving liquidity, facilitating Canadian ownership and allowing the maintenance of the existing vote ownership. An event study of fifty-four proposals by Canadian firms to reorganize existing common shares into full voting and restricted classes finds that the reorganizations not associated with a change in dividends generate significantly negative abnormal returns, indicating that the reorganizations reduce firm value.