Corporate Ownership Structure and the Informativeness of Accounting Earnings in East Asia

Abstract

This paper hypothesizes that the threat of expropriation by controlling owners in East Asian corporations lowers the credibility of accounting earnings and hence the stock price informativeness of those earnings. The complicated share ownership structure of East Asian corporations, characterized by a voting control that is highly concentrated in the hands of families, and a large separation of their voting rights from cash flow rights, provides controlling owners with both the ability and incentive to expropriate minority shareholders. We document that the informativeness of earnings, measured by the earnings-return relation, decreases with the level of an ultimate owner's voting control and the extent to which the owner's voting rights exceed her cash flow rights. We also find that family control per se does not lower the informativeness of earnings. Earnings become less informative when controlling families maintain high voting power and large separation of voting from cash flow rights. Our results are generally robust to controls for firm size, market-to-book assets, leverage, number of industry segments operated by the firm, and to varying the starting and ending dates of the stock return window.

JEL Classification: G32, M41