Price differences between equity classes

Abstract

Price differences between equities of different classes have long been of interest to financial economists. Price differences between voting and nonvoting equity have, for example, been used as evidence for the existence of private benefits of control. The main potential theoretical explanations for observed price differences are: value of control, foreign ownership restrictions and liquidity differences. In this paper we consider the case of Norway. The Norwegian case is instructive because of a natural experiment due to changes in regulation. In the Norwegian equity market there are significant price differences. The nature of the differences change over time. In the early part of the period nonvoting shares traded at a significant premium to voting shares, indicating that restrictions on foreign ownership were the most important determinant of observed price differences, dominating explanations based on voting power. As soon as restictions on foreign ownership of Norwegian stocks were lifted, voting shares started trading at a premium to nonvoting.