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Fundamentals of Financial Management 15th Edition

Fundamentals of Financial Management (15th Edition)

Book Edition15th Edition
PublisherCengage Learning
Section 9-2: Types of Common Stock
Chapter 9, Section 9-2, SelfTest, Exercise 02
Page 320

What are some reasons a company might use classified stock?

Here is a tip:

Classified stock is a type of common stock that is given a special designation to meet the specific needs of the company. 


Issuing multiple classes of stock with different voting rights enables a company to circumvent the one share = one vote norm. For example, a company needs to raise money through equity but the owners want to maintain the control of the company, so the firm will issue a class of stock (typically designated as Class A, B, C, etc.) with different voting rights or perhaps no voting rights at all. Alternatively, a company can issue a separate class of stock with greater voting power, as Google did for its insiders, where their class had 10 votes per share rather than the one vote per share of public shares.

Verified Answer

Classified stock is used to create more than one share class and to differentiate the classes primarily in terms of voting rights. This allows company founders to issue shares with less or no voting rights in order to raise capital without necessarily diluting their control of the company.

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