Asiasn review of Financial research

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Asian Review of Financial Research Vol.33 No.4 pp.491-539
Does Diversification of Share Classes Increase Firm Value?
Sojung Kim Korea University Business School
Sunwoo Hwang University of Cambridge Judge Business School
Woochan Kim Korea University Business School
Key Words : Share class,Convertible preferred stock,Redeemable preferred stock,Entrenchment,Financial constraint


Firms can issue stocks classified in many ways, including in terms of voting rights, dividend rights, redemption rights, and conversion rights. This study investigates the desirability of giving firms greater freedom to choose their share classes. Making use of the setting created by the 2011 Commercial Act amendment that significantly relaxed regulation over share classes in Korea, we study the motivation behind and the effect of adopting two newly emergent classes: preferred stocks convertible to voting stocks at the discretion of management and preferred stocks redeemable at the discretion of investors. We find that firms adopt the former for managerial entrenchment purposes and destroy firm value, while firms adopt the latter in times of financial constraint but fail to arrest the decline in firm value.
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