Discount for Lack of Voting Rights (Stock) – Definition

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Discount for Lack of Voting Rights (Stock) Definition

It is a fixed amount or percentage deducted for the selling price of a block of shares that lacks voting rights.

A Little More on What is Discount for Lack of Voting Rights

Some companies issue two types of shares in the market, each type having different rights attached to it. One class of stocks are issued in public which lacks the voting power while the other class is offered only to the founders, executives and family members who are allowed participate in the annual voting process or can elect the board of members.

Due to the difference in voting power, the valuation of each type of share is different, and the difference is calculated as the discount for lack of voting rights.

The nonvoting shareholders are entitled to receive dividends from the company but do have the right to participate in the voting. Preferred stocks generally do not have a voting right attached to it and thus the value of preferred stocks is lower than the voting stocks. This difference is known as the discount for lack of voting rights.

References for Lack of Voting Rights

Discount for Lack of Voting Rights

Earnings and dividend informativeness when cash flow rights are separated from voting rights, Francis, J., Schipper, K., & Vincent, L. (2005). Journal of accounting and economics, 39(2), 329-360. This paper contrasts the informativeness of earnings and dividends for firms with dual class and single class ownership structures. Results of both across-sample tests  and within-sample tests show that earnings are generally less informative, and dividends are at least as informative, for dual class firms. The paper interprets these results as suggesting that the net effect of dual class structures is to reduce the credibility of earnings and to enhance the salience of dividends as measures of performance.

The promise and pitfalls of the new Voting Rights Act, Persily, N. (2007). Yale LJ, 117, 174. In the summer of 2006, Congress reauthorized the expiring provisions of the Voting Rights Act (VRA) with a unanimous vote in the Senate and with limited opposition in the House of Representatives. This Article describes the unprecedented legislative history of this law, and the political and constitutional constraints that led the law to take the form that it did. It also presents an interpretation of the new retrogression standard that avoids the partisan bias of alternatives while emphasizing the importance of racially polarized voting to the constitutionality and meaning of this new law.

The” Results” Test of Section 2 of the¬†Voting Rights¬†Act: Abandoning the Intent Standard, Parker, F. R. (1983). Virginia Law Review, 715-764.

Voting in corporate law, Easterbrook, F. H., & Fischel, D. R. (1983). The Journal of Law and Economics, 26(2), 395-427.

Equity ownership concentration and firm value: Evidence from private equity financings, Wruck, K. H. (1989). Journal of Financial economics, 23(1), 3-28.

The value of control: implications for control premia, minority discounts and voting share differentials, Damodaran, A. (2005). This paper examines the ingredients of the control premium. In particular, it argues that the value of controlling a firm has to lie in being able to run it differently (and better). Consequently, the value of control will be greater for poorly managed firms than well run ones. The paper shows that the expected likelihood of control changing is built into the price of every publicly traded company and that this provides a way of measuring the payoff to strong corporate governance.

Quiet Revolution in Minority Voting Rights, The, McDonald, L. (1989). Vand. L. Rev., 42, 1249.

The evolution of shareholder voting rights: Separation of ownership and consumption, Hansmann, H., & Pargendler, M. (2013). Yale LJ, 123, 948. The nineteenth century saw the standardization and rapid spread of the modern business corporation around the world. This paper argues, in contrast, that restricted voting rules generally served not to protect shareholders as investors, but to protect them as consumers. This perspective also sheds light on the unusual importance given to the doctrine of ultra vires in the nineteenth century.

Stock pyramids, cross-ownership, and dual class equity: the mechanisms and agency costs of separating control from cash-flow rights, Bebchuk, L. A., Kraakman, R., & Triantis, G. (2000). In Concentrated corporate ownership (pp. 295-318). University of Chicago Press. This paper examines common arrangements for separating control from cash flow rights: stock pyramids, cross-ownership structures, and dual class equity structures. It describes the ways in which such arrangements enable a controlling shareholder or group to maintain a complete lock on the control of a company while holding less than a majority of the cash flow rights associated with its equity. Next, it analyzes the consequences and agency costs of these arrangements.

Factors affecting the value of the stock voting right: Evidence from the Swiss equity market, Kunz, R. M., & Angel, J. J. (1996). Financial Management, 7-20. This paper analyses the different factors affecting the stock voting rights in Switzerland. It analyses the discount offered by companies to individuals with voting rights.

The Unfairness of Applying¬†Lack¬†of Marketability¬†Discounts¬†to Determine Fair Value in Dissenters’¬†Rights¬†Cases, Hollis, B. J. (1999). J. Corp. L.,¬†25, 137.

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