At the end of 1983, up to 10 per cent of the aggregate value of the Toronto Stock Exchange was accounted for by shares with restricted voting privileges. In most cases, these shares were distributed to holders of the original common stock. The approach is similar to a stock split, where the firm exchanges, say, one restricted voting (RV) share and one superior voting (SV) share for each original common.

Analysis of the cumulated, cross-sectional differences between the returns observed over such a stock-split period and model-generated expected returns reveals the price effects of RV share issuance. There are no significant effects prior to a firm’s announcement of intent to issue RV shares and only weak evidence of a price decline in conjunction with the announcement. A significant fraction of firms exhibit declining share prices in conjunction with the actual issuance of RV shares, however. Furthermore, the decline is traceable to a decrease in RV share prices, which precedes an increase in SV share prices by about one day. In effect, holders of SV shares enjoy a relative positive premium of roughly 7 per cent.

The evidence suggests that investors are likely to “vote with their feet”—to choose alternative investments rather than hold shares with restricted voting privileges. It is thus particularly important that minority shareholders be given a say in a firm’s decision to issue such shares.