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

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.

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