Statutory Voting

In political elections, one person is entitled to one vote. However, the same is not always true with common stock. Voting rights for common shares are important since they may determine who runs the company via its board of directors, and for a host of other reasons. What do you think is the main reason for having share classes with different voting rights?

Incorrect. Although an arbitrage opportunity may be created if there are differences in prices between the share classes, this is not the _main_ reason for having multiple share classes.

Correct! Sometimes the founders of a company desire to maintain control of the company even if they do not own a majority of the shares. The easiest way to do this is to have multiple share classes, most often two, with different voting rights.

Incorrect. Multiple share classes almost always have the same dividend rights. Therefore, it is usually not possible to cater to a range of investors seeking either a high or low dividend payout.

Companies with two or more share classes make up the exception, not the rule. The vast majority of companies have a policy of one share, one vote for their common stock. This structure is referred to as __statutory voting.__ Why do you think investors generally prefer to invest in the common shares of firms with statutory voting?

Incorrect. Firms with statutory voting comprise the very large majority of all firms. Therefore, they cover all industries and are not likely to be less volatile.

Incorrect. Employees of most firms are not involved in corporate-governance issues. Therefore, it cannot be inferred that employees of firms with statutory voting are more or less motivated.

Correct! Hostile takeovers are virtually impossible in firms with two share classes, since the founders, or their descendants, control the stock. Therefore, takeovers are more likely in firms with statutory voting. The greater the probability of a takeover through a merger or acquisition, the more the stock is worth, all other things being equal.

In summary: [[summary]]

Multiple share classes will likely create an arbitrage opportunity, resulting in increased trading volume for the stock

Multiple share classes may make it easier for a person to control the stock if the share classes have different voting rights

Multiple share classes most often have different dividend policies, making it easier to attract investors seeking low or high dividend payouts

Employees of firms with statutory voting tend to be more motivated

The industries of firms with statutory voting tend to be less volatile

It is easier for these firms to be bought out in a merger or acquisition

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