The valuation of equity securities without voting rights or with supernormal (i.e., superior) voting rights is a common occurrence in a bankruptcy environment. This is true with regard to a debt restructuring where creditors may wind up as nonvoting or supervoting shareholders. It is also true in the design of a reorganization plan that results in multiple classes of stockholders. These multiple classes of stockholders often have varying voting rights.

Empirical evidence indicates that the stock market price for publicly traded voting common shares is generally greater than the stock market price for comparable publicly traded non-voting common shares. Empirical evidence also indicates that the stock market price for super voting common stock is generally greater than the stock market price for comparable normal voting common stock.

Accordingly, these empirical data indicate that shareholders pay a price premium for voting privileges related to the common shares of a public corporation. The empirical data also indicates that shareholders will extract a price discount for the lack of voting privileges related to the common shares of a public corporation. While there is not sufficient empirical transaction pricing data to mathematically prove this hypothesis, valuation analysts generally agree that this relationship also holds for shares of private corporations, LLC units, LLP units and other equity ownership interests.

Voting Rights

For purposes of this discussion, we define voting common stock as having (1) one vote per share or (2) a fraction of a vote per share while another class of stock has one vote per share. We define super voting common stock as having either (1) a greater number of votes per share than the voting common stock or (2) the ability to elect a disproportionately high number of board of directors members. Therefore, this class of stock has greater-than-normal voting rights in a corporation that has at least two classes of common stock outstanding. Also, we define non-voting common stock as having no voting rights per share. Therefore, this class of stock has less-than-normal voting rights in a corporation that has at least two classes of common stock outstanding.

Our categories of "voting" stock and "non-voting" stock are not absolute. That is, we have not strictly limited our analysis to a comparison of (1) stock with one vote per share and (2) stock with no vote per share. Rather, our analysis considers the general pricing differences between three voting rights-related conditions: (1) stock with normal voting rights, (2) stock with greater-than-normal voting rights and (3) stock with less than normal voting rights.

Voting shares enable the shareholders to vote on certain corporate matters such as electing the board of directors (who oversee the management of the corporation). Non-voting shares do not allow the shareholders to vote on certain corporate matters. In some cases, the voting power of non-voting shares may be limited to only those corporate matters that are specified by state corporation law. Other than voting rights, the voting shares and non-voting shares of the corporations considered in our analysis are typically comparable with regard to the shareholder investment risks and expected returns.

Super voting shares (1) have more than one vote per share and (2) typically elect the majority of the corporation's board of directors. Other than voting rights, the voting and super voting shares of the corporations considered in our analysis are typically comparable with regard to the shareholder investment risks and expected returns.

Objectives of the Lack of Voting Rights/Voting Rights Study

This discussion presents the results of recent empirical research on (1) the market-derived price discount on the lack of voting rights (or of inferior voting rights) and (2) the market-derived price premium for voting rights (or of superior voting rights). First, we will summarize the recent professional literature with regard to the discount for lack of voting rights (DLVR) and the premium for voting rights (PVR) studies. Second, we will report the results of a DLVR/PVR study recently performed by Willamette Management Associates (WMA).

This DLVR/PVR study considered both the (1) price discounts/price premiums related to voting rights on a per share basis and (2) allocation of a corporation's total equity value between shareholder voting rights only and all other shareholder ownership rights. The objectives of the WMA DLVR/PVR study were to quantify:

1. the market-derived price discount associated with the lack of voting rights (or inferior voting rights) of common stock, and
2. the market-derived price premium associated with the voting rights (or superior voting rights) of common stock.

An additional objective was to identify any corporate attributes/factors that affect the magnitude of the DLVR/PVR. The corporate attributes/factors considered in the study include (1) company size, (2) stock exchange listing, (3) subject industry, (4) stock classes (voting/non-voting vs. super voting/voting) and (5) concentration of stock owned by founders/insiders. The final objective was to quantify the value of voting rights only as a percent of the total bundle of legal rights associated with common stock ownership.

The WMA DLVR/PVR study analyzed these research objectives using empirical stock market data as of two time periods: (1) Dec. 30, 1994, and (2) Dec. 31, 1999.

We selected Dec. 31, 1999, as the most recent analysis date for two related reasons. First, that date includes most of the stock price "irrational exuberance" of the late 1990s and early 2000. It is the last calendar year end before the dot.com and general stock market price increase "bubble" burst. Second, after the stock market "bubble" burst in 2000, the market experienced a severe price correction period through most of 2002. Since the correction period, the market has experienced a period of price increases in 2003 and early 2004. However, the market has not yet returned to the "irrational exuberance" prices of 2000. This recent period of price correction/price increase may have caused a short-term aberration in the relationship of voting/ non-voting stock prices. Accordingly, we selected an analysis date prior to this potentially aberrational period.

We selected Dec. 31, 1994, as the first analysis date simply because it represents the middle of the decade of the 1990s. The decade of the 1990s experienced a fairly consistent trend of stock market price increases. We selected Dec. 31, 1994, to represent (1) a period normally within a longer-term market cycle and (2) a period before the influence of the rapid dotcom and general stock market.

Numerous analysts have quantified the DLVR/PVR over different time periods. As part of our analysis, we reviewed recent published DLVR/PVR studies. We reviewed these published studies looking for both (1) trends in the empirical DLVR/PVR conclusions and (2) consistencies/ inconsistencies with the WMA DLVR/PVR study conclusions.

Relationship Between DLVR and PVR

Most empirical DLVR/PVR studies directly quantify the price premium for voting rights. This relationship is quantified as follows:

where P_S equals the price of the stock with superior rights, and P_I equals the price of the stock with inferior voting rights.

For instance, if the subject company's voting stock sells for $22 per share and the otherwise comparable subject company's non-voting stock sells for $20 per share, the PVR is calculated as follows:

Likewise, most empirical DLVR/PVR studies indirectly quantify the price discount for lack of voting rights. That is, the DLVR is calculated based on the previously determined PVR. This DLVR relationship is quantified as follows:

For instance, if the subject company PVR is determined (from the above example) to be 10 percent, the DLVR is calculated as follows:

Therefore, a 10 percent PVR implies a 9.1 percent DLVR, and a 9.1 percent DLVR implies a 10 percent PVR.

This relationship is the methodology the WMA study used to extract the DLVR from the calculated PVR. First, we calculated the PVR from the empirical stock price data. Second, we quantified the DLVR (using the above-indicated formula) from the calculated PVR.

Review of Published DLVR/PVR Studies

Previously published DLVR/PVR studies have covered the time period of 1940-94. There is a diverse range of both nations and stock exchanges covered by these DLVR/PVR studies, including the United States, Canada, Italy, Great Britain, Switzerland, Sweden and Israel. The results of many recently published DLVR/PVR studies are presented in Table 1.¹

Many of the above-listed DLVR/PVR studies are not directly applicable to U.S. corporations listed on domestic stock exchanges. This is because there are significant differences between various countries with regard to (1) securities laws (particularly with regard to shareholder rights), (2) stock exchange listing and regulation requirements, (3) public reporting and shareholder disclosure requirements and (4) the relative rights of non-voting shareholders vs. voting shareholders.

Even within the same country (e.g., within the United States), federal securities laws and stock exchange regulations have changed over time. For that reason, the market-derived DLVR/PVR may have changed since the above-listed studies were performed. Accordingly, the results of DLVR/PVR studies encompassing earlier time periods may no longer be applicable as of the current date.

The DLVR/PVR studies performed by O'Shea and Siwicki and Houlihan, Lokey, Howard, & Zukin appear to be the most relevant to contemporary domestic corporations. This is because these two DLVR/PVR studies are the most recent and pertain to the U.S. securities markets. The results of both of these two studies conclude both a mean and a median price PVR of less than 5 percent.

The WMADLVR/PVR

First, we identified corporations with two classes of common stock outstanding as of Dec. 31, 1994, or Dec. 31, 1999. Second, we collected and analyzed stock price data regarding superior voting rights shares vs. inferior voting rights shares. Because of this, we limited our study to corporations with classes of stock that differed only in voting rights. Other security features, such as differences in dividend rights and liquidation preference, can also affect share price. Third, to ensure that the price discount/price premium data we collected/analyzed were only related to voting rights, we excluded from our study all corporations with differing dividend, liquidation and other security-ownership rights.

We identified multiple stock class companies using the Standard & Poor's Compustat database. We identified all corporations listed in the Compustat database that had two classes of common stock outstanding as of either Dec. 31, 1994, or Dec. 31, 1999. From this list of multiple common stock class corporations, we eliminated all corporations with two classes of common stock with ownership differences other than voting rights. From this reduced list, we eliminated all multiple common stock class corporations (1) that were not domestic (i.e., United States)-based companies, (2) that were inactively traded at any time during our observation period and (3) were penny stocks (defined herein as trading for less than $1 per share) at any time during our observation period. Based on this criteria, we selected in 28 multiple common stock class corporations as of Dec. 31, 1994, and 28 multiple common stock class corporations as of Dec. 31, 1999.

The 1994 WMA DLVR/PVR Study

The first group of multiple stock class corporations were analyzed using stock market data as of Dec. 31, 1994 ("the 1994 study"). We included 28 domestic corporations in the 1994 study. For each corporation, both the closing price as of Dec. 30, 1994 (i.e., the Dec. 30, 1994, closing price because Dec. 31, 1994, was a Saturday) and the average closing price for the three-month period of October to December 1994 were compared for each class of common stock. This analysis also considered the following descriptive data: (1) the primary industry Standard Industrial Classification (SIC) code, as reported by Compustat; (2) the number of shares outstanding (in each class of stock) as of Dec. 31, 1994; (3) the total market capitalization (including both (i) total common equity and (ii) total equity); and (4) the composition (e.g., insider, institutional, block owners, etc.) of stock ownership.

For the 28 corporations, the mean PVR was 3.0 percent and the median PVR was 1.5 percent as of Dec. 31, 1994. The mean PVR for the three-month period of October to December 1994 was 2.8 percent, and the median PVR for the same three-month period was 2.0 percent. The mean DLVR was 2.9 percent and the median DLVR was 1.5 percent as of Dec. 31, 1994. For the three-month period of October to December 1994, the mean DLVR was 2.7 percent and the median DLVR was 2.0 percent.

For all 28 corporations, the mean value of voting rights represented 0.8 percent of total common equity value, and the median value of voting rights represented 0.4 percent of the total common equity value. Both of these conclusions relate to pricing data as of Dec. 31, 1994. These conclusions can be interpreted as follows: Of the total value of all common equity ownership rights in the selected corporations, 0.8 percent (as the mean) and 0.4 percent (as the median) represented the single influence related to the value of voting rights only.

The 1994 study attempted to identify factors that affect the magnitude of the DLVR/PVR. We considered the following factors in the analysis: (1) the size of the subject company, (2) the stock exchange the stock is listed on, (3) the principal industry of the subject, (4) voting/non-voting vs. super voting/voting and (5) the percent of stock owned by company founders/insiders.

The first factor was the size of the subject company. We measured the size of the company using the total common equity value. For example, the Readers Digest Association Inc. stock experienced a PVR "discount" of almost 9 percent. Readers Digest Association Inc. was also one of the larger companies included in the 1994 study, with a total common equity of nearly $5.4 billion. The stock of the two largest companies in the 1994 study, Tele Communications Inc. and Viacom Inc., experienced PVR of 6.9 and 2.2 percent, respectively. Other companies with total common equity value over $1 billion experienced a PVR range of from 0 percent to more than 5 percent. Accordingly, the large equity size does not predict/influence the size of the DLVR/PVR.

The smaller companies included in the 1994 study did not indicate a pattern with regard to DLVR/PVR either. The two smallest companies in the 1994 study, (i.e., Federal Agriculture and Plymouth Rubber), both experienced a PVR of 0 percent. However, the next smallest company (i.e., Exx Inc.) experienced a PVR of 1.6 percent. Therefore, we concluded that the size of the subject company is not a significant factor in predicting/influencing the size of the DLVR/PVR. However, the 1994 study does indicate that as the size of the subject company increases, the value of voting rights tends to represent a smaller percentage of total common equity value outstanding.

The second factor was the stock exchange on which the subject company is listed. Common stocks listed on the NASDAQ experienced the highest mean and median PVR, 5.5 percent and 3.9 percent, respectively. For common stocks listed on the American Stock Exchange, the mean PVR was 2.5 percent and the median PVR was 1.6 percent. The common stocks listed on the New York Stock Exchange experienced the lowest PVR, with a mean PVR "discount" of 2.4 percent and a median PVR "discount" of 1.2 percent. Due to the significant differences between the PVR indications, it seems that the exchange on which a stock is traded does affect the magnitude of the PVR.

The third factor was the principal industry of the subject company. The principal industry was determined using the standard industrial classification (SIC) code. The multiple stock class corporations included companies in the following industries: (1) manufacturing; (2) transportation, communications, electric gas and sanitary services; (3) retail trade; (4) finance, insurance and real estate; and (5) services.

Companies operating primarily in the manufacturing industry experienced a mean PVR of 0.1 percent and a median PVR of 0.6 percent. Companies operating primarily in the transportation, communications, electric, gas and sanitary services industry sector experienced a mean PVR of 1.8 percent and a median PVR of 1.4 percent. Companies operating primarily in the retail trade industry experienced the highest mean and median PVR. The mean PVR was 7.3 percent and the median PVR was 6.3 percent. Companies operating primarily in the finance, insurance and real estate industry sector experienced a mean PVR of 8.7 percent and a median PVR of 0 percent. There was one company that operated primarily in the services industry, and it had a PVR of 5.5 percent.

The lowest mean and median PVR was experienced by companies operating in the manufacturing industry. The highest mean PVR was experienced by companies operating in the finance, insurance and real estate industry, and the highest median PVR was experienced by companies operating in the retail industry.

The fourth factor was the relative voting rights relationship of the multiple classes of stock (i.e., whether the corporation had voting/non-voting classes of stock or voting/super voting classes of stock). The mean PVR for companies with both voting and non-voting shares was 3.1 percent. The mean PVR for companies with both super voting and voting shares was lower, at 2.9 percent. However, the relationship of the median PVR was reversed. The median PVR for companies with both voting and non-voting shares was 0.0 percent. The median PVR for companies with both super voting and voting shares was higher, at 2.7 percent. Accordingly, the relative voting rights classes of stock outstanding does not appear to predict/influence the size of the DLVR/PVR.

The fifth factor was the percentage of common shares outstanding that was controlled by company founders and/or insiders (e.g., management). There were only three companies in the 1994 study where the largest single shareholder owned more than 50 percent of the outstanding shares. In one instance, the subject company actually experienced a "discount" related to the voting class of stock vs. the non-voting class of stock. In another such instance, there was no PVR related to the voting rights stock vs. the non-voting rights stock. And in the third instance, the indicated PVR was less than the mean PVR for all companies in the 1994 study.

One would expect that there would be a very small PVR if a single shareholder owned more than 50 percent of the outstanding shares. In such a case, the voting rights would not carry as much importance to the minority stockholders. This is because one majority shareholder could effectively control the vote. For companies where corporate insiders owned a majority (or nearly a majority) of the voting shares outstanding, the PVR was generally negative. There was one instance where the PVR was 0 percent, and one instance where the PVR was 2.1 percent. In general, if a single individual or a handful of individual insiders owns the majority of the voting shares outstanding, then the PVR will be lower than would otherwise be, all other factors being equal.

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Numerous analysts have published empirical studies that quantify the appropriate valuation adjustments related to voting privileges.... This discussion presents the results of a new study that quantifies the DLVR/PVR for valuations performed for bankruptcy...purposes.

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The 1999 WMA DLVR/PVR Study

The second group of multiple stock class corporations were analyzed using stock market data as of Dec. 31, 1999. We included 28 domestic corporations in the 1999 study. In the 1999 study, we collected the same capital market data and the same descriptive company data in the 1994 study. The DLVR/PVR was calculated using market-closing stock price data as of Dec. 31, 1999. As with the 1994 study, we also considered the average daily closing stock prices for the three-month period of October through December 1999.

For the 1999 study, the mean PVR was 12.7 percent for the entire sample of 28 corporations. This PVR conclusion is unexpectedly high, given the results of the 1994 study and the conclusions of previous published DLVR/PVR studies. One company, Acmat Corp., experienced a PVR of 180 percent. As of Dec. 31, 1999, the mean PVR excluding Acmat was 6.5 percent. The median PVR for all 28 companies as of Dec. 31, 1999, was 2.8 percent. The three-month price data indicated a mean PVR of 13.2 percent including Acmat and a 7.8 percent PVR excluding Acmat. The three-month median PVR was 0.6 percent.

As of Dec. 31, 1999, the mean DLVR was 6.1 percent (excluding Acmat). As of Dec. 31, 1999, the median DLVR was 2.7 percent. For the three months of October to December 1999, the mean DLVR was 7.2 percent (excluding Acmat). For the three months of October to December 1999, the median DLVR was 0.6 percent. The mean value of voting rights alone represented 2.8 percent of the total common stock value of the 28 corporations included in the 1999 study. The mean value of voting rights alone represented 1.9 percent of the total common stock value of the 27 corporations included in the 1999 study after excluding the outlier Acmat. The median value of voting rights alone represented 0.2 percent of the total common stock value of the 28 corporations.

Even after removing the outlier, Acmat, the PVR results in 1999 were higher than the PVR results in 1994. To analyze what was affecting these results, we considered the same factors as for the 1994 study results.

First, of the nine companies with total common equity value of more than $1 billion, six companies experienced PVR "discounts." One of the larger companies had a PVR of 0 percent, and the other two large companies had a PVR lower than the average. All of the companies with total common equity value of more than $1 billion experienced a PVR lower than the average. The majority of companies with total common equity value of less than $100 million experienced a PVR greater than the average. Accordingly, there appears to be a stronger relationship between the size of the company and the PVR in the 1999 study results than in the 1994 study results. The 1999 study indicates that as the size of the subject company increases, the value of voting rights represents a smaller percentage of total common equity value outstanding.

Second, unlike the 1994 data, the mean PVR for companies traded on the NASDAQ (excluding Acmat) in 1999 was the lowest of the three stock exchanges. The mean PVR of the NASDAQ companies was 4.0 percent and the median PVR of the NASDAQ companies was 1.2 percent. The New York Stock Exchange and American Stock Exchange companies experienced a similar mean PVR, with 8.0 percent and 8.8 percent, respectively. The New York Stock Exchange companies experienced a median PVR of 2.8 percent, and American Stock Exchange companies experienced a median PVR of 7.1 percent.

Third, we considered the principal industry of the subject company, which was determined using the SIC code. The multiple stock class corporations included companies in the following industries: (1) manufacturing; (2) transportation, communications, electric gas and sanitary services; (3) retail trade; (4) finance, insurance and real estate; and (5) services. Companies operating primarily in the manufacturing industry experienced a mean PVR of 5.7 percent and a median PVR of 3.0 percent. Companies operating primarily in the transportation, communications, electric, gas and sanitary services industry sector experienced a mean PVR of 10.4 percent and a median PVR of 7.9 percent.

There was one company that operated primarily in the retail trade industry, and it had a PVR of 11.8 percent. Companies operating primarily in the finance, insurance and real estate industry sector experienced a mean PVR (excluding Acmat) of 3.8 percent and a median PVR of 10.9 percent. Companies operating primarily in the services industry experienced a mean PVR of 6.1 percent and a median PVR of 1.2 percent. The lowest mean and median PVR was experienced by companies operating in the finance, insurance and real estate industry (excluding Acmat). The highest mean PVR was experienced by the one company operating in the retail industry, and the highest median PVR was experienced by companies operating in the finance, insurance and real estate industries.

Fourth, the mean PVR was 5.6 percent for companies with voting and non-voting shares. For companies with super voting and voting shares, the mean PVR was higher, at 7.2 percent (without Acmat). In 1994, the mean PVR for voting/non-voting shares was higher than the overall mean PVR. In addition, the super voting/voting mean PVR was lower than the overall mean PVR. The 1999 study indicates the opposite relationship. The mean PVR for voting/non-voting is lower than the overall mean PVR. Also, the super voting/voting means PVR is higher than the overall mean PVR. In the 1999 study, the median PVR for companies with both voting and non-voting shares was 1.4 percent, and the median PVR for companies with both super voting and voting shares was 3.0 percent.

Fifth, there were only two companies where the largest shareholder owned more than 50 percent of the shares in the 1999 study. One company experienced a PVR "discount" of 9.4 percent, while the other company experienced a PVR of 22.4 percent. Because the 22.4 percent PVR is unusual for a company where the majority of the shares are owned by a single shareholder, there is likely another factor responsible for producing that level of PVR. There were five companies where insiders held a majority of the voting shares. The average PVR for these companies was significantly larger than the overall average PVR. This is the opposite result from what we found for the companies in the 1994 study.

Summary and Conclusion

Estimating the appropriate valuation adjustments (i.e., discounts or premiums) related to non-voting and super voting stock is a common procedure in a bankruptcy valuation. Numerous analysts have published empirical studies that quantify the appropriate valuation adjustments related to voting privileges (or the lack thereof). This discussion presents the results of a new study that quantifies the DLVR/PVR for valuations performed for bankruptcy (and other) purposes.

The WMA study concluded that the mean PVR was 3.0 percent and the median PVR was 1.5 percent, both as of Dec. 31, 1994. The mean DLVR was 2.9 percent and the median DLVR was 1.5 percent, both as of Dec. 31, 1994. As of Dec. 31, 1999, the mean PVR was 6.5 percent and the median PVR was 2.8 percent. As of Dec. 31, 1999, the mean DLVR was 6.1 percent and the median DLVR was 2.7 percent. These results are fundamentally consistent with previous DLVR/PVR studies of U.S. corporations on domestic stock exchanges. At least with regard to the corporate attributes considered in the WMA study, there was inconclusive evidence as to the factors that predict/influence the size of the DLVR/PVR. As of Dec. 31, 1994, the value of voting rights represents a mean 0.8 percent and a median 0.4 percent of the value of the total common equity of the selected multiple stock class corporations.

As of Dec. 31, 1999, the value of voting rights represented a mean 1.9 percent and a median 0.2 percent of the value of the total common equity of the selected multiple stock class corporations. For both time periods, the size of the voting rights as a percent of the total bundle of equity ownership rights is inversely related to the size of the equity value of the multiple stock class corporations.

Footnotes

¹ Sources are: Lease, Ronald C., McConnell, John J., Mikkelson, Wayne H., "The Market Value of Control in Publicly Traded Corporations," Journal of Financial Economics, Vol. 11, (1983), pp. 439-471; O'Shea, Kevin C. and Siwicki, Robert M., "Stock Price Premiums for Voting Rights Attributable to Minority Interests," Business Valuation Review, December 1991, pp. 165-171; Much, Paul J. and Fagan, Timothy J., "The Value of Voting Rights," Financial Valuation, pp. 1-7; Smith, Brian F. and Amoako-Adu, Ben, "Relative Prices of Dual Class Shares," Journal of Financial and Quantitative Analysis, Vol. 30 (June 1995), pp. 223-239; Zingales, Luigi, "What Determines the Value of Corporate Votes?" Quarterly Journal of Economics, November 1995, pp. 1047-1071; "The Value of the Voting Right: A Study of the Milan Stock Exchange Experience." The Review of Financial Studies, Vol. 7 (Spring 1994), pp. 125-148; Kunz, Roger M. and James J. Angel, "Factors Affecting the Value of the Stock Voting Right: Evidence from the Swiss Equity Market," Financial Management, Vol. 25 (Autumn 1996), pp. 7-20; Rydqvist, Kristian, "Takeover Bids and the Relative Prices of Shares that Differ in their Voting Rights," Journal of Financial Economics, Vol. 20 (1996), pp. 1407-1425; Megginson, William I., "Restricted Voting Stock, Acquisition Premiums and the Market Value of Corporate Control," The Financial Review, May 1990, pp. 175-198; Levy, Haim. "Economic Evaluation of Voting Power of Common Stock," The Journal of Finance, Vol. 37, no. 1 (March 1982), pp. 79-93. Return to article