Nasdaq market has proven that it can provide a deep, liquid market for common
stocks, and the defection of GM would have hurt the NYSE much more than GM.
As these examples illustrate, the right to vote is often a distinguishing characteris-
tic between different classes of stock. Suppose two classes of stock differ in but one re-
spect: One class has voting rights but the other does not. As you would expect, the
stock with voting rights would be more valuable. In the United States, which has a le-
gal system with fairly strong protection for minority stockholders (that is, noncontrol-
ling stockholders), voting stock typically sells at a price 4 to 6 percent above that of
otherwise similar nonvoting stock. Thus, if a stock with no voting rights sold for $50,
then one with voting rights would probably sell for $52 to $53. In those countries with
legal systems that provide less protection for minority stockholders, the right to vote
is far more valuable. For example, voting stock on average sells for 45 percent more
than nonvoting stock in Israel, and for 82 percent more in Italy.
As we noted above, General Motors created its Class H common stock as a part
of its acquisition of Hughes Aircraft. This type of stock, with dividends tied to a par-
ticular part of a company, is called tracking stock. It also is called target stock. Al-
though GM used its tracking stock in an acquisition, other companies are attempting
to use such stock to increase shareholder value. For example, in 1995 US West had
several business areas with very different growth prospects, ranging from slow-
growth local telephone services to high-growth cellular, cable television, and direc-
tory services. US West felt that investors were unable to correctly value its high-
growth lines of business, since cash flows from slow-growth and high-growth
businesses were mingled. To separate the cash flows and to allow separate valuations,
the company issued tracking stocks. Other companies in the telephone industry, such
as Sprint, have also issued tracking stock. Similarly, Georgia-Pacific Corp. issued
tracking stock for its timber business, and USX Corp. has tracking stocks for its oil,
natural gas, and steel divisions. Despite this trend, many analysts are skeptical as to
whether tracking stock increases a company’s total market value. Companies still re-
port consolidated financial statements for the entire company, and they have consid-
erable leeway in allocating costs and reporting the financial results for the various di-
visions, even those with tracking stock. Thus, a tracking stock is not the same as the
stock of an independent, stand-alone company.
What are some reasons a company might use classified stock?
The Market for Common Stock
Some companies are so small that their common stocks are not actively traded; they
are owned by only a few people, usually the companies’ managers. Such firms are said
to be privately owned,or closely held, corporations,and their stock is called closely
held stock.In contrast, the stocks of most larger companies are owned by a large num-
ber of investors, most of whom are not active in management. Such companies are
called publicly owned corporations,and their stock is called publicly held stock.
As we saw in Chapter 1, the stocks of smaller publicly owned firms are not listed
on a physical location exchange or Nasdaq; they trade in the over-the-counter (OTC)
market, and the companies and their stocks are said to be unlisted.However, larger
publicly owned companies generally apply for listing on a formal exchange, and they
and their stocks are said to be listed.Many companies are first listed on Nasdaq or on
a regional exchange, such as the Pacific Coast or Midwest exchanges. Once they be-
come large enough to be listed on the “Big Board,” many, but by no means all, choose
190 CHAPTER 5 Stocks and Their Valuation
186 Stocks and Their Valuation
