Loyalty Shares with Tenure Voting: Does the Default Rule Matter? Evidence from the Loi Florange Experiment

Marco Becht Université libre de Bruxelles Yuliya Kamisarenka Stockholm School of Economics in Riga Anete Pajuste Stockholm School of Economics in Riga

Abstract The contractual theory of the firm predicts that companies adopt charters that maximize firms’ value regardless of the default rule. We test this proposition around an exogenous switch of the default from a one-share-one-vote regime to tenure voting following a legal reform in France. In initial public offerings (IPOs), tenure voting is primarily adopted by families, and after the reform its use increased slightly but not significantly. The change in default rule has no significant impact on companies’ characteristics or valuations. For companies that were already listed with one-share-one-vote systems and would have been forced to switch to tenure voting by default, we observe a revealed preference for the choice they had made at the IPO; one-share-one-vote companies preserve their prereform status, unless the French state has a blocking minority. Overall, the results suggest that once firms have optimized, changing the default rule imposes transaction costs without changing outcomes.

1. Introduction In this paper we test predictions of contractarian theory for initial public offering (IPO) charters in the context of a legal reform in France that changed the default

We are grateful to Patrick Bolton, Emiliano Catan, Dhammika Dharmapala, Luca Enriques, Ju- lian Franks, Leo Goldschmidt, Ulrich Hege, Mike Klausner, Beni Lauterbach, Ernst Maug, Benjamin Maury, Colin Mayer, Chiara Mosca, Ed Rock, Mark Roe, Josh White, Yishay Yafeh and seminar par- ticipants at Bar Ilan University, Euronext, the Stockholm School of Economics in Riga, Vanderbilt University Law School, European Corporate Governance Institute Roundtables hosted by Jones Day Brussels and New York University, and the launch conference of The Oxford Handbook of Corpo- rate Law and Governance for helpful comments. Žans Cvetkovs, Diana Karhu, Lasha Mtchedlishvili, Konstantins Šeļegs, Artyom Semianchuk, Violeta Toncu, Davit Ubilava provided excellent research assistance. We acknowledge financial support from the Goldschmidt Chair at the Solvay Brussels School of Economics and Management, Université libre de Bruxelles.

473 474 The Journal of LAW & ECONOMICS

rule from a one-share-one-vote system to tenure voting.1 The reform also forced listed companies that had adopted a one-share-one-vote system to reconfirm their choice after the IPO. If firms adopt IPO charters that maximize the firm’s value, we should observe no change in the proportion of firms that opt out of the one-share-one-vote system before and after the reform, nor should we see any IPO value effects from the reform. Likewise, if the prereform arrangements were the outcome of an efficient bargain, listed companies with a one-share-one-vote system forced to adopt tenure voting ex post should revert after the reform.2 We empirically test these propositions for two groups, the population of IPO firms (flow analysis) and a sample of midstream firms (stock analysis). In general, the contractual theory of the firm stipulates that public corporations are a nexus of contracts that maximize value when economic agents can bargain, transaction costs are low, and there are few externalities (Easterbrook and Fischel 1991; Klausner 2006).3 The contract is defined by corporate law of the country or state and the specific rules a firm adopts. Corporate law can set immutable rules that parties are unable to change or default rules that companies can alter by opting out (Ayres and Gertner 1989).4 Empirically, contractarian theory predicts that heterogenous firms have diverse contractual arrangements unless rules are immutable. The theory also makes the normative claim that default rules are preferable to hard rules, because the latter will be suboptimal for many firms. The theory has been tested extensively in the context of IPO charters in the United States. Pre-IPO shareholders should want a firm’s shares to sell at the highest possible price, and “they have incentives to cre- ate the kind of firm, governance structure, and securities the customers in capital markets want” (Easterbrook and Fischel 1991, p. 4). In contrast with the predictions of the theory, in the United States default choices that favor management are considerably less likely to be changed by companies than default choices favoring investors (Listokin 2009). The evidence is not conclusive because it might

1 Tenure voting (loyalty shares with tenure voting) provides shareholders with multiple voting rights as a function of the holding period, it is anchored in the corporate charter or corporate law, and it does not change the capital structure. Tenure voting is less controversial than dual-class shares because it treats all shareholders equally, at least in legal terms (Berger, Davidoff Solomon, and Ben- jamin 2017). Loyalty share charters already exist in the United States (Dallas and Barry 2015), but their operation is fraught with difficulties (Berger, Davidoff Solomon, and Benjamin 2017). Tech- nological solutions are available, and a group of technology entrepreneurs has obtained regulatory approval to set up the Long-Term Stock Exchange and is planning to make tenure voting an integral part of the listing rules (Osipovich and Berman 2017). Consequently, tenure-voting structures are receiving increased attention in the United States (Edelman, Jiang, and Thomas 2018). They have also been introduced recently in Italy and Belgium (Bajo et al. 2019; Mosca 2019; Santoro et al. 2015), and they are under discussion in Spain (Gurrea Martínez 2019). 2 The new default rule for the stock of companies already listed at the time of the reform is likely to be sticky because the reversal requires a supermajority vote. 3 In general, the theory relies on the Coase theorem (Coase 1960) and related work (Hart 1989; Holmstrom and Tirole 1989; Jensen and Meckling 1976). 4 Altering rules define what a firm must do to change a default rule (Ayres 2006). Depending on the altering rule, default rules can be more or less sticky (McDonnell 2007). Tenure Voting 475 be optimal to change default rules favoring investors more often than default rules favoring management.5 France has a long tradition of loyalty shares with tenure voting, a system used by more than half of French listed companies (Belot 2005; Chene 2008). Tradi- tionally, the one-share-one-vote system was the default rule, but shareholders were allowed to opt out by adopting statutes that give double-voting rights to loyal shareholders, typically after a holding period of 2 years or longer. On March 29, 2014, a new law, the Loi Florange, changed the default system from a one- share-one-vote regime to tenure voting for IPO companies. Listed companies that wanted to keep a one-share-one-vote system had just over 2 years to opt out of tenure voting via a supermajority vote.6 The empirical evidence for IPO companies does not contradict the contractarian view but is not fully conclusive. The fraction of firms going public with tenure-voting shares before and after the reform is not significantly different, and there is no significant difference in the IPO’s value before and after the reform. However, the population of IPO companies is relatively small, the confidence intervals are relatively wide, and tenure-voting adoption increased from 50 percent to 61 percent for all IPOs and from 64 percent to 74 percent among family- controlled companies. We cannot exclude that the new default rule made tenure voting more palatable for some family firms. This is consistent with behavioral theories like framing and not consistent with pure contractarian theory, but the change is relatively small, so contracting is still relevant. The results for the stock of listed companies are unambiguous. Most midstream firms (70 percent) that had adopted a one-share-one-vote system explicitly rejected tenure voting after the reform. One-share-one-vote companies revealed a clear preference for the voting system they had adopted during the IPO process. The general exceptions were companies in which the French state held a blocking minority.7 There was no grandfathering of previous choices, and France the regulator gave favorable treatment to France the shareholder. Before the reform, the French state could not opt out of the one-share-one-vote system for most of its holdings in listed companies because the state lacked the necessary supermajority; after the reform, the state had enough votes to lock in tenure voting. After the reform, the voting power of the blocks increased by obtaining tenure- voting privileges. The operation enhanced the influence of the French state as a shareholder by increasing the voting power of its share blocks for the same ownership interest. Our main contribution to the literature is empirical evidence on the contractarian view (Easterbrook and Fischel 1991) and the analysis of default rules (Ayres

5 In addition, US initial public offering charters are remarkably homogenous (Daines and Klaus- ner 2001; Klausner 2013), which is an unlikely contracting outcome but not impossible. 6 The reform is described in detail in Appendix OA. 7 The finding is consistent with the view that “protectionist objectives, rather than agency cost considerations that dominate the literature, are the proximate cause of corporate reforms with surprising frequency” (Pargendler 2019, abstract). In one case, the reform helped a controversial French media mogul to acquire and lock in minority control. 476 The Journal of LAW & ECONOMICS and Gertner 1989). The legal experiment in France generates exogenous variation that makes our tests more robust than previous evidence on IPO charters and default rules (Daines and Klausner 2001; Listokin 2009). We find that once firms have optimized, changing the default rule imposes transaction costs without changing outcomes. In addition, we investigate the impact on firms’ values when tenure voting is used as a control-enhancing mechanism that is legally different but functionally similar to dual-class shares. There is evidence that firms with voting rights that are proportional to cash flow rights have higher stock valuations (Bebchuk, Co- hen, and Ferrell 2009; Bennedsen and Nielsen 2010; Gompers, Ishii, and Metrick 2010). Our empirical evidence shows a positive (but insignificant) value premium (Tobin’s q) in firms using tenure voting both before and after the Loi Florange.8 Low valuations are associated with the presence of the French state, not per se with tenure voting.9 There is one parallel study on Italy that has similar findings for the adoption of tenure voting and its impact (Bajo et al. 2019). Loyalty shares are new in Italy, and the default rule never changed. The Italian results confirm that loyalty shares are primarily used by families. In addition, two recent studies on France (Be- lot, Ginglinger, and Starks 2019; Bourveau, Brochet, and Garel 2019) look at the stock of listed companies and do not consider the IPO flow separately. Bourveau, Brochet, and Garel (2019) analyze the stock and investigate the potential impact of the law on non-French institutional ownership. Belot, Ginglinger, and Starks (2019) confirm our Tobin’s q results using a measure of operational performance (return on assets) for a larger sample. They also conduct an event study around the publication of meeting agendas. This is problematic since most votes did not come as a surprise, and the meeting agenda contained no new information with respect to tenure-voting adoption. In addition, for companies that automatically switched from a one-share-one-vote system to tenure voting, there never was a vote and hence no singular event. Finally, meeting agendas contain other agenda items that are material. The remainder of the paper is organized as follows. Section 2 describes our methodology, the 2014 reform (the Loi Florange) we use for identification, and the data. Section 3 reports the impact of the reform on the IPO flow and the stock of listed companies, and Section 4 concludes. The Appendix provides definitions of the variables. Online Appendix OA sets out the law reform in more detail. On- line Appendix OB gives examples from IPO prospectuses for one-share-one-vote and tenure voting charters and lists the companies used in the IPO flow analysis and the sample of midstream firms.

8 The positive valuation for French loyalty share structures adopted before the Loi Florange con- trasts with the valuation discount observed in dual-class-share companies worldwide (Bennedsen and Nielsen 2010; Gompers, Ishii, and Metrick 2010). 9 Originally, the French state, and many other member states of the European Union, sought to secure continued influence over privatized companies using golden shares. However, those were largely struck down in a series of European Court of Justice rulings (Werner 2017), which left loyalty shares as a feasible alternative in France. Tenure Voting 477

2. Methodology and Data The empirical analysis relies on exogenous variation introduced by Law 2014- 384 of March 29, 2014, better known as Loi Florange (henceforth referred to as “the act”). The act modified article L225-123 and set tenure voting as the default rule. For IPO companies, the new default came into force March 31, 2016, but de facto it became effective March 29, 2014. Companies that wanted to list with a one-share-one-vote charter knew that they would be switched to tenure voting on March 31, 2016. They anticipated the switch by opting out via a charter amendment from March 29, 2014, onward. For example, the 2015 IPO prospectus of Amundi, the French asset manager, states, “The double voting right set down by article L. 225-123 of the French commercial code (Code de commerce) is expressly excluded” (Amundi 2016, p. 279). Table OB1 in Online Appendix OB reports additional examples from IPO prospectuses for one-share-one-vote and tenure-voting charters during the pre reform, transition, and postreform periods. Accordingly, we use March 29, 2014, as the reform date for the IPO analysis. Table OB2 lists the companies used in the IPO flow analysis. The sample includes all IPOs by firms incorporated in France that listed on Euronext Paris, Euronext Growth, or the Alternext market 4 years prior to the reform and 4 years after the reform (that is, during March 28, 2010–March 28, 2018). Altogether, 122 companies went public in that time period. For each company, we hand collected the IPO prospectus to check if the company had opted out of the one- share-one-vote system. In the full sample, 69 IPO companies (56.6 percent) adopted tenure voting. The required loyalty period is typically 2 years, and in some cases it is 3 or 4 years. The act also affected the stock of listed companies. Companies wishing to keep a one-share-one-vote system had just over 2 years to opt out of the new article L225-123. The required two-thirds supermajority charter amendment had to pass by March 31, 2016; otherwise tenure voting applied. The list of companies in- cluded in the stock analysis is provided in Table OB3. The list is based on the Société des Bourses Françaises 120 index on January 1, 2016, which comprises the most frequently traded stocks listed on the Paris Stock Exchange (Euronext Paris). We exclude 10 firms incorporated outside France, since the changes in French corporate law did not affect them. We also exclude six companies that went public after the introduction of the act on March 29, 2014, and include them in the IPO analysis. The final sample includes 104 companies (see Table OB3). For each company, we collected the 2014 and the 2016 annual reports and checked if the firm had implemented tenure voting. Again, the required loyalty period is typically 2 years but in some cases is 3, 4, 5, or 10 years. In 2014 there were 45 companies (43 percent) that had adopted a one-share-one-vote system by default and were forced out of equilibrium by the reform. In contrast, 59 companies (57 percent) had already adopted tenure voting and were unaffected. The leverage the largest shareholder obtains from tenure voting in each company is shown in Figure 1. Companies with tenure-voting charters show the non- 478 The Journal of LAW & ECONOMICS

Figure 1. Leverage of largest stockholders before reform

linear relationship between the size of capital stakes and votes under a tenure- voting charter. Figure 1 also shows that the number of votes of the largest block holder depends on the presence of other long-term shareholders.10 When no shareholder has held the stock for more than 2 years or all the shareholders have held the stock for more than 2 years, the fraction of votes held by the largest shareholder is equal to the fraction of capital held. Some stakes under tenure voting are on the 45-degree line. In those cases, the largest block holder has held the shares for less than 2 years, and the same is true for all other shareholders. In one case, the voting share is smaller than the capital share, because another shareholder already has double-voting rights while the largest block holder does not. Any shareholder with a voting share in excess of 33.33 percent could block a charter amendment aiming to remove tenure voting. Prior to the 2014 reform, companies could adopt tenure voting during the IPO or after going public with a one-share-one-vote system through a subsequent supermajority amendment. To find out how the 59 companies in the sample ended up with tenure voting, we investigate the nature of the prereform opt-out agree- ment. We obtained data going back to June 1999, which allowed us to classify 12 of the 59 tenure-voting companies. In all cases, tenure voting was introduced at the time of the IPO. We also recorded the age of the firms in the two groups.

10 In companies with dual-class capital structures that grant different numbers of votes in each class, the total number of votes is fixed. Tenure Voting 479

Firms with tenure voting were older on average. In March 2014, the median age of the 59 firms with tenure voting was 27 years, compared with 19 years for the 45 firms with one-share-one-vote systems. The difference is significant at the 1 percent level. To test the default-rule-irrelevance hypothesis, we start by analyzing the impact of the act on the IPO flow of firms. We continue by exploring the behavior and value effects of the stocks of firms directly affected by the reform.

3. Empirical Results 3.1. Did the Act Alter Initial Public Offerings? Table 1 presents the distribution of the sample of 122 IPOs from March 28, 2010, to March 28, 2018, that is, 4 years before and after the reform. Although the difference in the fraction of IPO firms that include the tenure-voting provision in their initial charter before and after the reform seems nontrivial, it is statistically insignificant, and the 95 percent confidence intervals of the before-reform and after-reform samples largely overlap. The precision of the estimates is limited by the relatively small sample size, which is the universe of all French IPOs during the 2010–18 period. Table 2 shows the pre-IPO ownership structure. We define the controlling owner as the largest shareholder holding at least 10 percent of the pre-IPO share capital. Of 122 IPO firms during the 2010–18 period, 60 are controlled by families, 47 are held by venture capital or private equity firms (VC), and the remaining five are either dispersed or controlled by other entities. Families are more frequent users of the tenure-voting system: 70 percent of family-controlled firms versus 42.6 percent of VC-controlled firms use tenure-voting shares, the difference being significant at the 1 percent level. However, there is no significant difference in the use of tenure-voting shares before and after the reform. There is a small increase in the use of tenure voting for both pre-IPO ownership types, but both increases are statistically insignificant and with largely overlapping confidence intervals. The summary statistics for the IPO firms’ characteristics are shown in Table 3. The number of observations is reduced from 122 to 116 because of missing price (returns) data for six firms. With the exception of IPOs’ proceeds and underwriters’ certification, univariate analysis shows no difference between pre- and postreform IPO firms’ characteristics. Over time, IPOs’ proceeds increased both in tenure-voting and one-share-one-vote firms, which is unlikely to be related to the Loi Florange. When comparing tenure-voting firms before and after the reform, a third-party underwriter is employed by all firms after the reform (100 percent) compared with 88 percent of firms before the reform, which is significantly different at the 5 percent level. The average initial day (5-day) returns are 3.4 percent (3.9 percent) before the reform and .3 percent (.25 percent) after the reform, and the difference is not significant. To extend the within-group results of Table 3, in Table 4 we analyze the 480 The Journal of LAW & ECONOMICS

Table 1 Firms with Initial Public Offerings

One-Share- One-Vote All Firms System Tenure Voting (N)(N) N % 95% CI Before March 28, 2014 52 26 26 50.0 [35.9, 64.1] After March 28, 2014 70 27 43 61.4 [49.7, 73.1] Total 122 53 69 56.6 [47.6, 65.5] Note. The sample is firms with initial public offerings on Euronext Paris, Euronext Growth, and Al- ternext between March 28, 2010, and March 28, 2018, 4 years before and after the Loi Florange. p = .211 (mean equality test). CI = confidence interval.

Table 2 Ownership Structures of Firms with Initial Public Offerings: Tenure Voting

Family Controlled VC Controlled N % 95% CI N % 95% CI Before March 28, 2014 25 64.0 [43.8, 84.2] 21 38.1 [15.4, 60.7] After March 28, 2014 35 74.3 [59.1, 89.5] 26 46.2 [25.6, 66.7] Total 60 70.0 [58.1, 81.9] 47 42.6 [27.9, 57.2] Note. The sample is firms with initial public offerings on Euronext Paris, Euronext Growth and Al- ternext between March 28, 2010, and March 28, 2018, 4 years before and after the Loi Florange. A firm is defined as family controlled if the largest shareholder is a family or group of families acting in concert and controls at least 10 percent of votes. Firms controlled by private equity or venture capital (VC) firms are similarly defined. For family-controlled firms,p = .400 (mean equality test); for VC-controlled firms,p = .588 (mean equality test). CI = confidence interval. difference- in-differences results for the main IPO firms’ characteristics between the tenure-voting and one-share-one-vote companies before and after the reform. The industry dummies are used in the regressions but are not reported. The results show that the gross IPO proceeds are significantly lower, family control is significantly greater, and VC control is significantly lower in tenure- voting firms compared with one-share-one-vote firms both before and after the reform. There are no other significant differences between tenure-voting and one-share-one- vote firms’ characteristics, nor are there any significant time (before and after reform) and difference-in-differences effects in the IPO firms. The results in Table 4 are indicative but may lack precision. We study the population, but the number of IPOs is relatively small. In future research, it will be interesting to study the longer-term effects of the reform. Finally, in Table 5 we estimate the effects of IPO value in a multivariate setting. Controlling for the most common determinants of IPO value (the proxies for ex ante uncertainty and underwriters’ certification), we do not find any evidence that IPO values (1-day and 5-day market-adjusted returns) of tenure- voting firms (or one-share-one-vote firms) are different before and after the reform. To control for size, we use gross IPO proceeds rather than post-IPO market capital- Tenure Voting 481

Table 3 Descriptive Statistics for Firms with Initial Public Offerings

Before March 28, 2014 After March 28, 2014 One-Share- One-Share- One-Vote Tenure One-Vote Tenure Regime Voting Total Regime Voting Total Market-Adjusted Return (1 Day) .049 .020 .034 −.010+ .011 .003 Market-Adjusted Return (5 Day) .050 .028 .039 .037 .018 .025 Age at IPO 10.05 9.96 10.00 10.74 12.63 11.90 Market Cap (€Millions) 295.54 140.78 214.79 699.07 328.72 471.57 Ln IPO Proceeds 3.04 2.46 2.74 3.77+ 3.34* 3.51 BTM .30 .34 .32 .36 .40 .38 High Tech .55 .38 .46 .41 .40 .40 UW .86 .88 .87 .96 1.00* .99 Note. The sample is firms with initial public offerings on Euronext Paris, Euronext Growth, and Al- ternext between March 28, 2010, and March 28, 2018, 4 years before and after the Loi Florange. N = 116. + p < .10; mean equality test. * p < .05; mean equality test. ization, because it shows larger between-firm variation in Table 3.11 The results are similar if we use the post-IPO market capitalization as a firm-size proxy. Tenure-voting adoption increases for some types of firms after passage of the Loi Florange, especially for family firms, but not significantly. The most likely ex- planation is that families in particular chose the IPO contract deliberately and that the choice is largely unaffected by the default rule, as suggested by contractarian theory. However, after the reform a nonnegligible fraction of families chose a loyalty share with a tenure-voting charter, which could be a result of the new framing through the inverted default rule or from inaction; before the reform doing nothing resulted in a one-share-one-vote system, and after the reform it resulted in tenure voting.

3.2. Did Listed Firms Revert? We now turn to the analysis of the stocks of firms that had already gone public at the time of the reform. We expected a larger impact of the reform than for the IPO flow because the default rule is a lot stickier. It is relatively easy to change a charter provision prior to an IPO; making a charter amendment after the firm is listed requires a two-thirds supermajority. The contractual freedom in the initial charter is considered to be considerably different from the situation midstream (Bebchuk 1989). To obtain a direct measure of potential reversal, we computed a pre- to postreform transition matrix (Table 6). The matrix shows that 69 percent (31 of 45) of one-share-one-vote firms that were affected by the introduction of the new default opted out, that is, made statute amendments to preserve the single-voting

11 We cannot include both because of multicollinearity issues. Table 4 Effect of Tenure-Voting Shares

Market- Market- Adjusted Adjusted Return Return Ln IPO Ln Market (1 Day) (5 Day) Proceeds Cap BTM High Tech UW Family VC Tenure Voting −.027 −.013 −.833* −.698+ .057 −.056 −.026 .384* −.360* (−.361) (−.152) (−2.072) (−1.793) (1.157) (−.423) (−.274) (2.486) (−2.425) After Reform −.064+ −.012 .368 .210 .014 .026 .073 .054 −.040 (−1.880) (−.194) (.968) (.585) (.293) (.211) (1.272) (.369) (−.274) Tenure Voting × After Reform .062 .014 .540 .378 −.027 .122 .069 −.172 .127 (.798) (.146) (1.007) (.755) (−.401) (.797) (.738) (−.831) (.647) Constant .046+ .041 3.261** 4.565** .328** .394** .885** .309** .573** (1.788) (1.155) (10.752) (15.645) (9.832) (4.209) (16.705) (2.947) (5.402) Adjusted R2 −.0663 −.0612 .257 .241 .279 .494 .156 .0819 .127 95% CI [−.09, .22] [−.18, .20] [−.52, 1.60] [−.62, 1.37] [−.16, .11] [−.18, .42] [−.12, .26] [−.58, .24] [−.26, .52] Note. Results are from a difference-in-differences analysis of tenure-voting shares before and after the reform on financial variables. The dummy variable Tenure Voting equals one for companies with tenure-voting shares at the initial public offering (IPO) and zero otherwise. The dummy variable After Reform equals one for companies with IPOs after March 28, 2014, and zero otherwise. The difference-in-differences estimator is Tenure Voting × After Reform. All regressions control for industry fixed effects. Eleven industries are specified according to the Global Industry Classification Standard. Robust t-statistics are in parentheses. N = 116. CI = confidence interval. + p < .10. * p < .05. ** p < .01. Tenure Voting 483

Table 5 Underpricing Analysis before and after the Reform

Market-Adjusted Market-Adjusted Return Return (1 Day) (5 Day) OSOV and After −.048 .002 (−1.279) (.032) Tenure Voting and Before −.041 −.025 (−.746) (−.357) Tenure Voting and After −.005 .014 (−.089) (.270) Ln IPO Proceeds .003 .014 (.335) (1.193) BTM .164 .244* (1.345) (1.998) High Tech −.012 −.027 (−.213) (−.376) UW −.262 −.303 (−1.357) (−1.533) Constant .219 .194 (1.239) (1.052) Adjusted R2 .0496 .0584 Note. The dummy variable OSOV and After equals one for companies that went public with a one-share-one-vote regime after March 28, 2014, and zero otherwise. The dummy variable Tenure Voting and Before equals one for companies that went public with a tenure-voting system before March 28, 2014, and zero otherwise. The dummy variable Tenure Voting and After is one for companies that went public with a tenure-voting system after March 28, 2014, and zero otherwise. All regressions control for industry fixed effects. Eleven industries are specified according to the Global In- dustry Classification Standard. Robust t-statistics are in parentheses. N = 116. * p < .05. structure after April 3, 2016. For brevity, we call this the group of single- single firms. The remaining 31 percent (14 of 45) firms switched into tenure voting (double voting) either after a failed vote to maintain the one-share-one-vote structure (seven firms) or automatically without a vote (seven firms).12 We investigate why recontracting failed for these firms in detail below. There were 58 firms that were not affected by the Loi Florange because they offered tenure- voting shares before the act. We call this the double-double group. Finally, one company (Legrand) had loyalty shares prior to the Loi Florange—that is, would

12 Although we consider only the most liquid and largest firms (the Société des Bourses Françaises 120 index), the transition rates are almost identical in a larger sample of French companies. Belot, Ginglinger, and Starks (2019) extend our transition analysis to a broader sample of over 400 firms and find that 68.6 percent (105 of 153) of one-share-one-vote firms preserved this share structure, while the rest switched to a tenure-voting system. Of 48 switchers, nine switched after a failed vote to maintain a one-share-one-vote system, three voted for introducing tenure voting, and the rest switched automatically (without a vote). 484 The Journal of LAW & ECONOMICS

Table 6 Transition Matrix

After One-Share- One-Vote Tenure Regime Voting Total Before N % N % N % One-share-one-vote regime 31 30 14 13 45 43 Tenure voting 1 1 58 56 59 57 Total 32 31 72 69 104 100 not be affected by the act—but decided to abandon the double-voting system and become a one-share-one-vote company through a shareholder vote. The Legrand case illustrates that shareholders can recontract either way through supermajority amendments. Table 7 reports the voting results for the resolutions that proposed to maintain a one-share-one-vote system.13 The resolution typically was one of many (20–30) on the meeting’s agenda. In the single-single group, all resolutions were sponsored by management (the board), and on average 97.4 percent of shareholders participating voted for maintaining the one-share-one-vote system. There were only 2.2 percent of the votes against, and .4 percent voted to abstain. The average participation rate (quorum) in the meeting was 69.6 percent. In one case, BNP Paribas, opposition from a minority block to revert to a one-share-one-vote system could be overcome despite a relatively low attendance rate. In each case, In- stitutional Shareholder Services (ISS) recommended voting in favor of the management’s proposal. Table 7 also reports the voting results for resolutions to maintain a one-vote- one-share system in a sample of seven firms that rejected the resolution (the single- double group). To adopt the bylaw amendments that would keep one vote 2 per share, 66.67 percent ( 3 ) of the votes were required to be in favor. If instead a simple majority (50 percent + one vote) had been required, only two of seven firms (Engie and Orange) would have succeeded in abandoning the one-share- one-vote structure. The average participation rate in these meetings was 63.0 percent, and 49.4 percent of votes cast were against the measure. Holding only 31.1 percent of the total votes was enough to block the resolution to revert to a one- share-one-vote system.14

13 For a sample resolution, see the meeting notice of Klepierre (2014). The proposed article 28 reads, “In all meetings, subject to any restrictions stipulated in the prevailing legislation, shareholders shall have one vote per share held or represented without restriction. Pursuant to the option provided for in article L.225-123 of the French Commercial Code, double voting rights will not be conferred on fully paid shares that have been registered in the name of the same shareholder for a period of at least two years” (Klepierre 2014, p. 12). 14 Participation rates at general meetings are endogenous and difficult to model. High participation rates are more likely when shareholders expect ex ante to be pivotal (Cvijanovic, Groen-Xu, and Zachariadis 2017). Tenure Voting 485

Table 7 also shows that five of the failed resolutions were sponsored by management (the board), and two were sponsored by shareholders. Again, the ISS recommended voting in favor of a one-share-one-vote system in all cases. The French state is the dominant shareholder in all firms except Vivendi, which is controlled by the Bolloré group. The recommendation of the board is more surprising. The boards of Air France–KLM, Alstom, Engie, and Renault recommended voting for a one-share-one-vote system and thereby against the French state, the major shareholder. The board of Veolia put forward a one-share-one- vote resolution but recommended voting against it.15 The boards of Orange and Vivendi recommended voting against their shareholders’ resolutions. Why did shareholders fail to file one-share-one-vote resolutions in the remaining cases? Figure 2 plots the equity stake held by the largest owner against the resulting voting stake before (2A) and after (2B) the reform in 14 companies that switched from a one-share-one-vote system to tenure voting after the law came into effect. The Loi Florange was in force on December 31, 2016. Hence, the voting power in Figure 2B includes the voting power of the largest owner obtained because of switching to the tenure-voting system. The strategic importance of the 33 percent blocking minority threshold for the single-double group is clearly vis- ible. All seven firms without a shareholder vote had a shareholder commanding 33.33 percent or more of the voting rights. Even with an attendance rate of 100 percent, the largest shareholder would have been able to block reversal from tenure voting to a one-share-one-vote system. In the group that voted, in six of the seven companies the largest shareholder held a stake smaller than 33.33 percent. There must have been residual doubt regarding the outcome, especially in the two companies with 100 percent free float (represented by a single marker at [0, 0]). Since the outcome of the vote was unclear, management or dissident shareholders put forward a charter amendment resolution. This evidence supports the no- tion that the Loi Florange changed the bargaining power of tenure-voting propo- nents. In 11 of 14 cases, the largest owner was unable to introduce loyalty shares with tenure voting before the reform but could block opting out after the act switched the default rule. The divergence of the control rights and cash flow rights (wedge) in state- controlled firms increased from .69 percent before theLoi Florange to 5.7 percent after passage of the act. As an example, in a one-share-one-vote firm with market capitalization of EUR 20 billion, an investor would require EUR 1 billion to increase the voting stake by 5 percent. The French government could effectively enhance its control rights by changing the default option from a single-vote to

15 The board provided the following rationale: “Your Board of Directors has decided to submit to the approval of the Shareholders Meeting [a] decision to amend the Articles of Association in order to opt out [of] the double voting rights for the benefit of shareholders and keep the ‘one share—one vote principle’. While leaving the decision to the Shareholders Meeting, your Board however does not approve this resolution and recommends voting against such an amendment in Article 10.1 of your Company’s Articles of Association as it considers that these legal provisions with respect to double voting rights are in the interest of the Company by bolstering its long-term shareholding structure” (Veolia 2015, p. 27). Table 7 Voting Results Voting Votes Present For Against Abstain Margin Outcome Management ISS Single-single: SE Air Liquide SA Atos SA BNP Paribas SA Capgemini Communications Euler Hermes Group Eutelsat SA Fonciere des Regions Gecina 47.31 75.74 ICADE 64.91 62.33 91.60 54.62 Innate Pharma SA 93.08 99.84 KlepierreSA Korian 79.07 78.23SA 95.27 99.99 97.70 L’Oreal SA Mercialys .53 .06 99.93 21.71 SA 77.51 4.73 Metropole Television SA 2.30 Natixis .01 51.86SA 6.39 Neopost SA .10 99.58 76.71 Nexans .03 .06SA 99.58 .00 61.33 Nexity .00 .00 78.58 84.38 27.08 33.84 75.93 83.97 99.70 12.23 .35 .04 29.27 99.71 31.70 .42 99.64 99.93 33.99 Pass Pass 99.80 97.90 82.88 Pass .28 67.40 33.93 Pass Pass .07 Pass .28 .00 .36 .07 77.43 For 99.13 For .07 .16 98.81 75.94 Pass For .02 33.58 For For 99.62 33.58 For .01 .00 .00 For 99.88 For .86 1.94 1.19 .13 Pass 33.70 For For Pass For For 33.71 For .02 33.64 33.93 31.90 33.80 .09 Pass .01 .00 For For Pass For Pass Pass .36 Pass Pass 33.13 32.81 .03 For For For For 33.62 For For Pass For Pass For 33.88 For Pass For For For Pass For For For For For For For For For For

486 rms es is 66 re-one-vote 5.47 Fail For For 9.37 Fail For For 22.70 Fail15.9515.48 Against Fail For Against For 14.81 Fail Against For 13.9926.04 Fail Fail For For For For − − − − − − − − 67.20 43.3059.03 56.69 50.05 49.85 .01 .10 International Shareholder Services. a a = Values are percentages. Single-single firms amended their statutes to preserve the one-share-one-vote structure. Single-double fi The proposal was sponsored by shareholders. a Renault SA Renault AverageDouble-single: LegrandNote. 72.45rejected their resolutions to retain the one-share-one-vote structure. Legrand had loyalty shares and then instituted a one-sha system through a shareholder vote. All proposals were sponsored by management except where indicated. The threshold for all valu 60.53 62.98 39.39 86.60 50.52 .08 98.51 49.40 1.49 .07 .00 32.51 Pass For For SA Veolia Environnement SA Vivendi 56.21 51.19percent. ISS 48.79 .02 Rexel SA Rexel SE SCOR SuezSA Technicolor SE Unibail-Rodamco SA Vinci AverageSingle-double: France–KLM 61.20 57.08 Air 60.54 62.06 98.33 99.99 88.46 96.59 69.80 60.35 58.59 1.66 .01 11.52 3.41 95.29 69.62 99.34 56.63 .01 .00 .02 97.41 4.70 .00 43.27 .58 32.33 33.99 22.46 30.59 2.22 .01 .10 Pass .08 Pass Pass Pass 29.29 .37 33.34 For For For Pass For 31.41 Pass For For For For For For For For Alstom SA Alstom SA Engie SA Orange 61.48 65.91 52.01 39.96 47.82 60.02 .17 .02

487 Figure 2. Leverage of largest stockholders for switchers (A) before and (B) after December 31, 2013. Tenure Voting 489 a double-vote system. The Loi Florange created a fundamental change in property rights in some cases, and the majority opinion was oppressed, as shown in Table 7. Did the change from the one-share-one-vote system as the default bolster the long-term shareholding structure of companies with tenure voting, as the French state and some company boards claimed? It is possible that the switch to tenure voting increased the willingness of the controlling shareholders to hold their blocks. We find no evidence to support this proposition. The average holding periods of other shareholders in tenure-voting firms and one-state-one-vote firms, when measured by annual turnover, is not significantly different before and after the act. This finding supports the skeptical view of the impact of short-termism on average holding periods (Fried 2015; Roe 2013). In addition, and somewhat paradoxically, the average holding period for companies if the French state is the dominant shareholder decreased during the sample period.16 Who blocked the complete reversal? Table 8 reports the distribution of control and ownership rights before and after the reform. The main change occurred in the number of listed firms controlled by the state. Before the passage of the act, only three state-controlled companies had adopted tenure voting; after the reform, 11 companies with state involvement used tenure voting. There is less change for family firms. The only significant change occurred for companies controlled by the Bolloré family, which used the act to tighten control over its py- ramidal group. As the IPO analysis showed, families usually introduced tenure voting during the IPO. The French state often acquired ownership stakes after the IPO (privatization), and the stakes were too small to pass supermajority amendments against the will of institutional shareholders.

3.3. Valuation of Listed Firms Finally, we turn to the analysis of potential value effects for listed companies associated with the reform. Table 9 presents descriptive statistics for the stock analysis variables as of March 28, 2014, and April 4, 2016. The average for Tobin’s Q is 1.51 at both points in time. The largest shareholder has on average 32.9 percent (32.3 percent) of the voting rights and 28.6 percent (27.2 percent) of the cash flow rights in 2014 (2016). Table 10 replicates the main cross-sectional value regressions of Bennedsen and Nielsen (2010) before and after the reform. The variable of interest is the tenure- voting dummy, which equals one if a firm uses tenure voting. We also report a specification with the control minus ownership (Wedge). The respective variables in Bennedsen and Nielsen (2010) are called the disproportionality dummy and the degree of disproportionality. Unlike Bennedsen and Nielsen, we find no negative valuation effect from the disproportional ownership structure (models 1 and 2). In fact, firms with tenure-voting charters have higher (but insignificant) valuations when we introduce the standard controls. The market

16 These unreported results are available from the authors on request. 490 The Journal of LAW & ECONOMICS

Table 8 Distribution of Control and Ownership Rights by Ownership Type

Loyalty Shares One-Share-One-Vote Regime N Fraction Capital Votes N Fraction Capital/Votes Before reform: Family 28 .47 35.7 45.8 7 .16 50.6 Corporate 9 .15 39.6 51.1 14 .31 34.2 Financial 8 .14 14.7 20.9 7 .16 33.8 State 3 .05 19.5 22.2 9 .20 41.6 Dispersed 11 .19 8 .18 Total 59 1.00 31.9 41.2 45 1.01 39.1 After reform: Family 31 .43 37.9 48.5 4 .13 35.8 Corporate 8 .11 38.1 50.3 10 .31 38.2 Financial 9 .13 19.4 23.2 7 .22 25.5 State 11 .15 35.5 42.3 2 .06 31.1 Dispersed 13 .18 9 .28 Total 72 1.00 34.7 43.7 32 1.00 33.2 Note. Results are percentages of average capital and votes. The controlling shareholder is the largest shareholder or group of shareholders acting in concert that hold at least 10 percent of voting rights. Family includes private persons with the same surname; Corporate includes private companies whose major shareholder is not one of the direct owners in the sample company; Financial includes financial institutions and insurance companies; State includes states, cities, and municipalities; and Dispersed includes the companies that do not have a controlling shareholder. does not discount tenure-voting charters when compared with classic differential voting. We find some weak support for Bennedsen and Nielsen’s result that the market discounts the use of disproportional ownership structures by families (model 3). Model 4 adds an interaction of the tenure-voting dummy and state ownership. We find weak evidence that markets also discount the use of disproportional ownership structures by the state. In the models in Table 10 that estimate the cross-sectional value regressions, when the default tenure-voting system became effective we observe a decrease in the tenure-voting share premium from .15 to a discount of −.051 (models 1 and 5). The reason behind this drop becomes apparent in model 6. The sample of tenure- voting firms in 2016 is contaminated by the switchers, the firms that used to have a single-vote system and adopted a double-vote system either automatically or after a failed vote to preserve a one-share-one-vote system. As observed in the univariate analysis, the switchers are the firms with the lowest value for To- bin’s Q in both 2014 and 2016. Regression models 6–8 confirm the negative and significant effect on value among the switching firms. The main results also hold in the difference-in-differences regression models in Table 11. We find no significant difference in Tobin’s Q before and after the treatment, that is, passage of the act. In model 1, in which one-state-one-vote companies are treated by the Loi Florange, the value for Tobin’s Q is (insignifi- cantly) lower than in double-voting companies, and there is no treatment effect. Tenure Voting 491

Table 9 Characteristics of Listed Firms

Mean Median Min Max SD As of March 28, 2014: Tobin’s Q 1.51 1.33 .91 3.20 .61 Size 9.26 9.05 7.05 12.89 1.57 Leverage 18.73 16.50 .62 46.87 13.15 Sales Growth .56 −.33 −34.99 29.82 11.92 Return on Assets 1.36 1.45 −4.54 5.13 2.24 Asset Tangibility 21.58 13.49 .89 82.77 22.08 Voting Rights 32.89 28.67 .00 84.70 25.29 Capital 28.64 23.78 .00 84.56 23.19 Wedge 4.25 .00 .00 16.80 5.76 As of April 4, 2016: Tobin’s Q 1.51 1.30 .91 3.20 .64 Size 9.48 9.27 7.05 12.89 1.49 Leverage 19.02 17.11 .62 46.87 13.21 Sales Growth 4.90 7.69 −34.99 29.82 16.17 Return on Assets 1.30 1.56 −4.54 5.13 2.15 Asset Tangibility 21.03 11.71 .89 82.77 22.53 Voting Rights 32.31 26.40 .00 90.32 27.15 Capital 27.16 20.25 .00 85.73 24.00 Wedge 5.15 2.55 −1.82 18.60 5.94 Note. Values for voting rights are controlling shareholders’ percentages of voting rights. N = 104.

In model 2, the treated group includes the 14 companies that switched from the single-vote system to tenure voting. Once again, we find significantly lower values for Tobin’s Q among the switchers, both before and after the treatment.17 What explains the negative average valuation among the firms that switched from a one-share-one-vote system to tenure voting? First, most of them are controlled by the state, and they are likely to have social or political goals instead of pure maximization of shareholder value in mind, or they might be run less efficiently (see model 9 in Table 10). The state might also use tenure voting to protect its interests against foreign influence (Pargendler 2019).18 Second, loyalty shares have been suggested as good takeover defenses (Moschetto and Teulon 2015). Tenure voting in France is used by block holders to enhance their voting power and can have a chilling effect on hostile takeovers and hedge fund activism. How- ever, this is also true for companies that had adopted tenure voting before 2014 and preserved it throughout the period. It is more likely that the lower valuation

17 We also implemented an event study around general meeting votes. The results are insignificant, but this evidence is not conclusive. There is no well-defined event date, and there is a large amount of confounding information released during shareholder meetings. 18 There is a wider literature on the connections among the corporate sector, politics, and the state. In France the evidence suggests that politically connected chief executive officers favor certain employees at the expense of financial investors (Bertrand et al. 2018); in Korea politicians allocate state resources to private shareholders in their network (Schoenherr 2019). + .0401 .149** .108) .0197 .141) 3.450) 1.185* 2.090) − − − − − − − − .0673 .138** .187) ( .0570 .0611 2.124) ( 3.150)1.206* ( − − − − − − + .0766 .138** .213) ( 2.141) ( 3.167)1.191* ( − − − − − − .0892 .126** .250) ( .0547 .0578 2.292) ( 2.912)1.260* ( − − − − − − + .0642 .150** .179) ( .0507.375) .00317 (.0218) .00166 (.0114) .00255 (.0173) ( 2.072) ( 3.592)1.162* ( − − − − − − − − .616) ( .348 .0175.0503) .109 (.343) (.261) .0828 (.0321) .0102 (.0158) .00511 (.247) .0773 .129** Table 10 Table 3.297) ( − − − − − − .497) ( .280 .0529 .0109 .124** .140) (.0271) ( .258 .908) (.873) 3.271) ( − − − − − − − ( − As of March 28, 2014 As of April 4, 2016 The Effect of Tenure-Voting Shares on Firms’ Value Firms’ on Shares The Effect Tenure-Voting of .692) ( .386 .0491 .125** .117) ( 3.227) ( − − − − − − (1) (2) (3) (4) (5) (6) (7) (8) (9) .588) ( .326 .124** (.0764) (.154) (.125) ( (.0201) ( (.704) (.278) (.412) (.540) (.557) (1.082) (1.034) (1.027) (.561) 3.331) ( − − − (1.334) (1.611) (1.471) ( (2.018) (2.101) (2.071) (2.073) (1.805) (1.601) (1.675) (1.624) (1.755) ( − ( Family × Leverage Asset TangibilitySales Growth .0244 .0492 .00798 .0434 Size Return on Assets .0518* .0536* .0529* .0544* .0605 Family .227 Tenure Voting CapitalTenure Voting .149 .165 .0631 .119 .211 .135 .174 .121 .248 .238 .237 .125

492 + .683* .30, .26] 2.084) − − − .457** .0853 (.285) .29, .30] [ 2.657) − − − Tenure Voting equals one switched from a one-share- effects. Eleven industries are specified .426** .29, .29] [ 2.910) ( − − − .345* .29, .29] [ 2.407) ( − confidence interval. − − ( = 104. CI =

N .32, .22] [ − .303 (.622) (1.348) (.691) (1.962) .06, .41] [ 1.336) ( − − − ( -statistics are in parentheses. t .05, .47] [ − (.910) .370 .364 .364 .360 .387 .407 .408 .402 .392 .07, .37] [ (6.052) (5.952) (5.961) (5.865) (6.585) (5.864) (6.024) (5.961) (6.282) − State × 2 R State .01. .10. .05. × <

< < Results are from cross-sectional regressions of Tobin’s Q on financial, ownership, and governance variables. The dummy variable

p p p

** * + Switch Switch ConstantAdjusted 2.513** 2.604** 2.470** 2.563** 3.051** 2.838** 2.933** 2.940** 3.029** Tenure Voting Note. for companies with a disproportional ownership structure and zero otherwise. The dummy variable Switch equals one if the company one-vote system to a tenure-voting between March 28, 2014, and April 4, 2016. All regressions control for industry fixed according to the Global Industry Classification Standard. Robust WedgeStateTenure Voting 95% CI .921 [ .105 .206 .170 .596

493 494 The Journal of LAW & ECONOMICS

Table 11 Effects of Tenure-Voting Shares on Firms’ Value

(1) (2) Size −.139** −.118** (−4.905) (−4.105) Leverage −.764* −.808* (−2.057) (−2.144) Asset Tangibility .0781 .0742 (.365) (.347) Sales Growth −.123 −.188 (−.495) (−.755) Return on Assets .0564** .0549** (2.714) (2.694) Capital .149 .237 (.946) (1.478) Time .0374 .0483 (.391) (.635) Treated −.139 (−1.389) Time × Treated .00909 (.0709) Treated Switch −.285** (−3.026) Time × Treated Switch −.0557 (−.503) Constant 2.869** 2.637** (8.924) (8.265) Adjusted R2 .420 .434 Note. Results are from difference-in-differences regressions of To- bin’s Q (panel data). Tobin’s Q is measured on March 28, 2014, and April 4, 2016. Treated firms are those with a one-share-one-vote structure. Time equals one after March 28, 2014. Treated Switch equals one for companies that switched from a one-share-one-vote system to a tenure-voting system between March 28, 2014, and April 4, 2016. All regressions control for industry fixed effects. Eleven industries are specified according to the Global Industry Classifica- tion Standard. Robust t-statistics are in parentheses. N = 208. * p < .05. ** p < .01. is due to the strong presence of the state as the main shareholder among the companies that fail to revert to a one-share-one-vote system (Table 8).

4. Conclusion This paper provides evidence on the use of loyalty shares with tenure voting in France and a reform of the default rule governing their adoption. The empirical findings support the freedom-of-contracting view and have implications for the debate surrounding control-enhancing mechanisms in IPO charters. Companies with one-share-one-vote charters reveal a strong preference for this contracting Tenure Voting 495 outcome. The reform was asymmetric, so we observe reversal only for this type of company. We have no evidence on how many companies would have reverted to tenure voting if they had been forced to adopt a one-share-one-vote system. However, we do observe a clear preference for tenure voting by family firms. The findings suggest that countries that offer no choice might unduly restrict the freedom of contracting between pre-IPO shareholders and public markets. Tenure voting in France is the dominant control-enhancing mechanism block holders use to leverage control. In effect, it has the same role as dual-class-share capitalizations with differential voting rights in other countries such as Denmark, Sweden, and the United States. The French practice has been replicated in Italy and Belgium and is under discussion in Spain. In 2014, the Loi Florange established tenure voting as the new default rule in IPOs, and one-share-one-vote companies had to take action to preserve their prereform status. The reform had no significant impact on IPOs’ charter choice, but the use of tenure voting increased slightly after the reform, especially among family firms. The choice by families appears deliberate and is largely unaffected by the default rule, as suggested by contractarian theory. This conclusion is consistent with parallel evidence on the adoption of tenure voting by family firms in Italy, where tenure voting became available only in 2014 (Bajo et al. 2019). The impact of the reform on the stock of listed companies is unambiguous and surprising. The new default rule was relatively sticky because a supermajority was required to revert to a one-share-one-vote system. Despite this obstacle, most companies reverted. Shareholders generally voted to return to a one-share-one- vote system. They behaved exactly as the contractarian theory predicts; ceteris paribus, shareholders want to renegotiate and return to the original contract. The idea that tenure-voting and one-share-one vote statutes were allocated efficiently before the reform is supported by high and unchanged Tobin’s q in both cases. One-share-one-vote companies that had the French state as a large shareholder did not revert. The state was unable to pass a supermajority amendment to adopt tenure voting before the reform but had a blocking minority after the reform that prevented reversal. The reform brought no advantages during the IPO process. The state always had the ability to adopt tenure voting during an initial public offering. The default rule appears to be largely irrelevant. Once firms have optimized, changing the default rule imposes transaction costs without changing outcomes. In the case of the Loi Florange, the change in the default rule was made for argu- ably opportunistic reasons: before the reform the state did not have sufficient voting power to adopt tenure voting with a minority interest. TheLoi Florange was a singular operation that allowed the French state to enhance its influence over a number of listed companies it considers strategic without the approval of existing public shareholders. 496 The Journal of LAW & ECONOMICS

Appendix Definitions of the Variables A1. Ownership Variables The ownership variables are from annual reports (documents de référence). Capital. Controlling shareholder’s share of the cash flow rights Controlling Shareholder. The largest shareholder or group of shareholders acting in concert holding at least 10 percent of the voting rights Corporate. Equals one if the controlling shareholder is a private company whose major shareholder is not one of the direct owners in the sample company Dispersed. Equals one if the company does not have a controlling shareholder Dual. Equals one if the company has a tenure-voting provision and zero otherwise Family. Equals one if the controlling shareholder is a family and zero otherwise Financial. Equals one if the controlling shareholder is a financial institution or insurance company State. Equals one if the controlling shareholder is the government (including public sector) and zero otherwise Switch. Equals one if the company switched from a one-share-one-vote regime to a loyalty-share system during the sample period VC. Equals one if the controlling shareholder is a private equity or venture capital firm and zero otherwise Voting Rights. Controlling shareholder’s share of the voting rights Wedge. Controlling shareholder’s votes minus the cash flow stake

A2. Flow Analysis Variables Information for the flow analysis on initial public offerings is from Thomson Reuters Eikon. After Reform. Equals one for companies with initial public offerings after March 28, 2016, and zero otherwise Age at IPO. Number of years from a company’s incorporation until the initial public offering BTM. Book-to-market ratio, which is the book value of equity per share divided by the IPO price (the first transaction price) High Tech. Equals one for high-technology companies (Standard Industrial Classification three-digit codes 283, 357, 366, 367, 382, 384, 481, 482, 489, 737, and 873), according to Kile and Phillips (2009) IPO Proceeds. Gross proceeds from the IPO (including overallotment) in millions of euros Market-Adjusted Return (1 Day). One-day return calculated by deducting the Société des Bourses Françaises 250 index returns from the respective stock returns relative to the IPO price (the first transaction price) Tenure Voting 497

Market-Adjusted Return (5 Day). Five-day return calculated by deducting the Société des Bourses Françaises 250 index returns from the respective stock returns relative to the IPO price (the first transaction price) Market Cap. Market capitalization (in millions of euros) after the IPO OSOV and After. Equals one for companies that went public with a one- share-one-vote regime after March 28, 2014, and zero otherwise Tenure Voting. Equals one for companies with tenure-voting shares at the initial public offering and zero otherwise Tenure Voting and After. Equals one for companies that went public with a tenure-voting system after March 28, 2014, and zero otherwise Tenure Voting and Before. Equals one for companies that went public with a tenure-voting system before March 28, 2014, and zero otherwise UW. Equals one if the IPO is underwritten by a third party

A3. Stock Analysis Variables The data for the analysis of firms’ stocks are from Bloomberg. Asset Tangibility. Net property, plant, and equipment divided by total assets Industry. Dummy variable with sectors specified according to the Global In- dustry Classification Standard: industrials, materials, information technology, fi- nancials, health care, consumer staples, energy, consumer discretionary, utilities, real estate, and telecommunication services Leverage. Long-term debt divided by total assets Return on Assets. Net income divided by total assets (percentage) Sales Growth. Revenue growth (a year-on-year change in sales revenue) Size. Natural logarithm of total assets (in millions of euros) Tobin’s Q. Market value of equity plus book value of total assets minus book value of equity divided by book value of total assets Treated. Equals one for companies with a one-share-one-vote structure Treated Switch. Equals one for companies that switched from a one-share- one-vote system to a tenure-voting system between March 28, 2014, and April 4, 2016

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