Executive Turnover at Dual-Class Firms
In recent years, an increasing percentage of tech companies have gone public with a dual-class structure in which the founders hold high-vote stock. Commentators worry that dual-class entrenches founder-CEOs and allows them to hold onto power long after the IPO.
We collect data for a sample of U.S. VC-backed firms that went public from 2002 to 2020, investigating founder-CEO tenure and reasons for CEO turnover in firms with and without dual-class structures.
Contrary to conventional assumptions, our time-to-event analysis reveals only a modest difference in CEO turnover between dual-class and single-class firms. Dual-class firms had a slightly longer median time to CEO turnover (6.6 years) compared to single-class firms (4.8 years).
Importantly, this difference is driven by a lower rate of M&A sales involving dual-class firms, rather than entrenched CEOs resisting departure. When excluding turnovers caused by firm sales, we find no significant difference in CEO tenure between dual-class and single-class firms. Turnovers at dual-class firms are often preceded by poor shareholder returns and an increase in short-term liabilities, and news coverage often mentions poor performance as a reason for the change. Most dual-class turnovers occurred well before any sunset clauses could trigger.
These results challenge the conventional wisdom that dual-class stock shields underperforming founder-CEOs from turnover.
About the Law and Economics Workshop
Michigan’s Law and Economics Workshop provides an opportunity for faculty and students from across the University to engage with cutting-edge law and economics research by leading scholars on a wide range of legal and policy topics.
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