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The Quality of Earnings Information in Dual-Class Firms: Persistence and Predictability

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  • Rimona Palas
  • Dov Solomon

Abstract

A dual-class firm structure, in which one class of shares confers more votes per share than the other, creates a gap between voting rights and cash flow rights. In this paper, we examine the quality of the financial reports of dual- versus single-class firms publicly traded in the U.S. over the 2012–2017 period, as measured by persistence and predictive ability of earnings and cash flows. The results are based on comprehensive information from financial statements analyzed using across-sample and within-sample tests. An additional external indicator of financial restatement filings is also used to support the results. The findings demonstrate that the quality of financial reports is higher for dual-class firms than for single-class firms and increases over time. This suggests that the freedom from market pressures is stronger than agency costs, encouraging founders to provide investors with higher-quality information in exchange for superior voting rights. The results uncover important and counterintuitive evidence about the existence of a tradeoff between the dilution of voting rights and enhancement of the credibility of information provided to investors.

Suggested Citation

  • Rimona Palas & Dov Solomon, 2022. "The Quality of Earnings Information in Dual-Class Firms: Persistence and Predictability," Journal of Law, Finance, and Accounting, now publishers, vol. 7(1), pages 127-164, April.
    • Handle: RePEc:now:jnllfa:108.00000059
    DOI: 10.1561/108.00000059
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    Cited by:

    1. Palas, Rimona & Solomon, Dov & Gafni, Dalit & Baum, Ido, 2023. "Does wedge size matter? Financial reporting quality and effective regulation of dual-class firms," Finance Research Letters, Elsevier, vol. 54(C).

    More about this item

    Keywords

    Dual-class; earnings quality; financial reports; earnings persistence; earnings prediction; cash flow prediction; restatements; agency problems; disclosure; corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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