Earnings informativeness in dual-class firms

Olesya Lobanova, Abhijit Barua, Suchismita Mishra and Arun J. Prakash

Review of Accounting and Finance, 2019, vol. 18, issue 3, 399-431

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 forDechowet 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: Earnings quality; Information asymmetry; Discretionary accruals; Information environment; Earnings informativeness; Dual-class share structure (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:raf-09-2017-0178

DOI: 10.1108/RAF-09-2017-0178

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