The purpose of this paper is to examine what is weighted more by the investors when valuing a dual-class firm’s stock – greater agency costs or better accrual quality of the dual-class firm in contrast to the single-class firm.
Using the financial data of firms issuing multiple classes of stock (hereafter dual-class firms) and firms issuing single class of stock (hereafter single-class firms), the authors measure the effect of firm’s ownership structure (dual class versus single class) on the earnings response coefficients (ERCs) of prior, current and future period earnings.
The authors find that investors care more about agency costs than the quality of accruals in evaluating the earnings of dual-class firms. Specifically, the authors find that current annual returns of the firm are negatively associated with dual-class ownership structure and that earnings informativeness and predictability are decreasing in dual-class ownership of the firm as reflected in decreasing ERCs.
This study adds to prior literature on dual-class ownership which reports greater agency costs and better accrual quality at dual-class firms in contrast to single-class firms. This study contributes to the literature on earnings informativeness and predictability by evaluating the effect of ownership structure on the ERCs of the firm. Investors should be careful when valuing a dual-class firm and should consider agency costs in addition to accrual quality of reported earnings at such firms.
The authors would like to acknowledge Paul Gompers, Joy Ishii and Andrew Metrick for generously sharing their data on dual-class companies. They would like to thank all the participants at TIIKM’s 2nd Annual International Conference on Accounting and Finance (2015) for their valuable comments and suggestions. The authors would also like to thank all the brown bag participants at Western Michigan University for their valuable comments and suggestions.
Saini, J.S., Arugaslan, O. and DeMello, J. (2017), "What values more? Agency costs or accrual quality", Journal of Financial Reporting and Accounting, Vol. 15 No. 1, pp. 22-38. https://doi.org/10.1108/JFRA-10-2015-0088
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