Bolstering family control: Evidence from loyalty shares

Published in: Journal of Corporate Finance

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This paper studies the determinants and effects of introducing loyalty shares in Italy.

Loyalty shares allow “loyal” shareholders to have their votes doubled and constitute a way of departing from the typical one-share, one-vote regime.

Corporate governance codes worldwide recommend not deviating from the one-share, one-vote principle, as such deviations have been found to favor tunneling, reduce market discipline in takeover contests, and generally be detrimental to shareholder value.

Corporate governance activists, proxy advisors, and institutional investors heavily promoted one-share one-vote in the 1990s and early 2000s, resulting in a wave of dual-class unifications.

Proponents of loyalty shares stress their alleged ability to mitigate short-termism. The 2012 European Commission’s Action Plan on “Modernising Company Law and Enhancing Corporate Governance in the European Union” advised the introduction of instruments, like loyalty shares, aimed at stimulating long-term investments by shareholders and counteracting short-termism.

Following this debate, several European countries, like France, Italy, Belgium, and the Netherlands, promulgated laws that either introduced or modified the discipline of loyalty shares.

Italy introduced loyalty shares in 2014. Since January 2015, Italian-listed firms have been allowed to grant “loyal” shareholders an extra vote per share after a continuous holding period of at least two years. The Italian legislator implemented an opt-in regime, leaving firms the choice of adopting loyalty shares. This solution differs from that which was chosen by French legislators in the contemporaneous Florange Act, enforcing an opt-out regime.

Forty-nine Italian-listed firms (approximately one-fifth of all firms listed on the main segment of Borsa Italiana) introduced loyalty shares between 2015 and 2019. The peak of adoptions was reached in 2015, with 18 instances. After that, the number of adoptions has stabilized at around 9 per year. At the time we write this piece, the number of adopters is seventy-one, almost one-third of all Italian listed firms.

In this article, we study the determinants and the effect of adopting loyalty shares in Italy, a country dominated by large shareholders (the controlling shareholder owns more than 50 percent of the firm’s equity, on average), but where the role and power of institutional shareholders have substantially increased over time. In such an environment, controlling shareholders may use loyalty shares as a control-enhancing mechanism to insulate themselves from market pressures and weaken minority investors. If so, the expected costs from the increased separation between ownership and control may outweigh the benefits of favoring long-term investments.

Our first result is that family firms are two to four times more likely to opt for loyalty shares than non-family firms. We report evidence that majority shareholders use loyalty shares to decrease their holdings in the controlled firms without affecting their control of voting rights. Such a decrease in equity capital is not correlated with ownership-diluting events, like acquisitions and seasoned equity offerings. We interpret these findings as evidence that families exploit loyalty shares to reduce their exposure to firm-specific investment while preserving control but not fostering external growth.

Our second relevant result concerns institutional investors. Contrarily to controlling shareholders, who have welcomed loyalty shares, institutional investors have voiced a negative reaction at shareholder meetings calling for their adoption. However, their vote “with their hands” was not followed by a “vote with their feet,” as we do not observe a negative market reaction either at the announcement or at the adoption, and we find no evidence of a decrease in their stakes. We explain this behavior with company-specific characteristics, as companies adopting loyalty shares appear to be more profitable, generate more cash, pay more dividends, invest more, and be more valued by the market.

Overall, this evidence suggests that bolstering family control is the main effect of the introduction of loyalty shares.


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Authors at the Department of Management

Emanuele Bajo – Full Professor

Academic disciplines: Finance

Teaching areas: Corporate Finance, Risk Management

Research fields:  IPO, Household Finance, and Corporate Risk Management

Professor of Finance at the University of Bologna, Associate Dean at the University of Bologna Business School (BBS), and Honorary Professor at the University of Queensland (Australia). He has been Adjunct Professor at Johns Hopkins University, San Diego State University, and Boston College.  He has published numerous articles in prestigious finance journals (among others, the Journal of Financial Economics and the Journal of Corporate Finance) and is the Executive Editor of the Journal of Economics and Business.

Massimiliano Barbi – Full Professor

Academic disciplines: Finance

Teaching areas: Corporate Finance, Risk Management

Research fields:  Corporate Governance, Corporate Risk Management

Professor of Finance at the University of Bologna. He received a Ph.D. in Banking and Finance (2009) from the Catholic University of Milan and was an Associate Lecturer of Risk Management at the Leeds University Business School (2010). His research has been published in finance journals such as the Journal of Corporate Finance, the Journal of Banking and Finance, and Quantitative Finance, among others.

Marco Bigelli – Full Professor

Academic disciplines: Finance

Teaching areas: Corporate Finance, Corporate Governance

Research fields:  Corporate Governance, Shareholders’ expropriations

Professor of Finance at the University of Bologna and has been Visiting Professor at the Johns Hopkins University, Università della Svizzera Italiana, Université de Paris XII, and the University of Strathclyde. Author of two books and numerous papers in international journals, he is also an independent director and President of the Risk Committee in a bank.