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Earnings informativeness in dual-class firms: An empirical investigation of the earnings quality and the information environment

Olesya Lobanova (Department of Accounting, Economics and Finance, University of Houston-Victoria, Victoria, Texas, USA)
Abhijit Barua (School of Accounting, Florida International University, Miami, Florida, USA)
Suchismita Mishra (Department of Finance, Florida International University, Miami, Florida, USA)
Arun J. Prakash (Department of Finance, Florida International University, Miami, Florida, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 19 June 2019

Issue publication date: 9 August 2019

Abstract

Purpose

The purpose of this study is to explain the poor informativeness of earnings in dual-class firms by examining the quality of earnings and the information environment.

Design/methodology/approach

The earnings informativeness, earnings quality and information environment of dual-class firms are compared with a matched sample of single-class firms. The authors have performed the returns-earnings association tests, examine the quality of earnings by using proxies for discretionary accruals, and examine the information environment by employing four empirical constructs: the analyst forecast dispersion, absolute forecast errors, Amihud’s (2002) illiquidity measure, and the bid-ask spread.

Findings

The results show that the quality of earnings is better while the quality of the information environment is worse in dual-class firms compared to single-class firms. Overall, the results suggest that an inferior information environment is a plausible explanation for the low informativeness of dual-class firms’ earnings.

Research limitations/implications

The results provide empirical support for Dechow et al. (2010) that the use of the earnings-returns association measure to draw conclusions about the quality of earnings is not appropriate in the presence of a poor information environment.

Originality/value

This is the first study to empirically show that low earnings informativeness in dual-class firms can be explained by the inferior quality of the information environment.

Keywords

Citation

Lobanova, O., Barua, A., Mishra, S. and Prakash, A.J. (2019), "Earnings informativeness in dual-class firms: An empirical investigation of the earnings quality and the information environment", Review of Accounting and Finance, Vol. 18 No. 3, pp. 399-431. https://doi.org/10.1108/RAF-09-2017-0178

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited