The Determinants of Differential Pricing of Dual Class Shares: Evidence from Listed Companies in Sri Lanka

Abstract

Differential pricing of dual class shares has become an intriguing topic in finance research. However, previous studies have not reached to a consensus about this price difference. Moreover, the observed price difference in Sri Lanka is significantly higher than what has been reported in most of the previous studies. Hence, this study investigates the determinants of substantial price differences between dual class shares in Sri Lankan equity market. Random effect model under panel data analysis is applied on the data collected from 19 listed companies within the time period of 2000 to 2016. The probability of control contest, firm performance, firm size and fraction of shares are identified as the determinants for differential pricing of dual class shares in Sri Lanka. Further, this study ratifies that the fraction of shares raises substantially the price difference and relative liquidity in equity shares is not relevant in explaining price difference in Sri Lanka.