Does wedge size matter? Financial reporting quality and effective regulation of dual-class firms

Rimona Palas, Dov Solomon, Dalit Gafni and Ido Baum

Finance Research Letters, 2023, vol. 54, issue C

Abstract: Dual-class capital structures create a gap (“wedge”) between voting and cash flow rights. Our analysis indicates that the larger the wedge, the higher the quality of financial reporting, reflecting a tradeoff between the dilution of voting rights and enhancement of the credibility of information provided to investors. It suggests that increasing management’s insulation from the market for corporate control is stronger than agency costs, reducing motivation to manipulate earnings. Moreover, better quality reporting allows for attracting second-class investors who agree to a larger wedge. Therefore, concerning financial reporting, a nuanced regulation restricting wedge size may not be more effective.

Keywords: Dual-class; Earnings quality; Financial reports; Disclosure; Corporate governance; Wedge (search for similar items in EconPapers)
JEL-codes: G32 G34 G38 K22 M41 M48 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323001472

DOI: 10.1016/j.frl.2023.103774

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