Disproportionate Insider Control and the Informativeness of Stock Returns about Future Earnings
55 Pages Posted: 5 May 2021 Last revised: 12 Sep 2022
Date Written: April 30, 2021
Abstract
We test whether agency conflicts generated by the divergence between insider voting rights and cash flow rights (i.e., disproportionate insider control) within dual-class firms reduce the informativeness of stock returns about future earnings. We find that the future earnings response coefficient (FERC), which measures the extent to which current returns incorporate future earnings news, is decreasing in disproportionate insider control, but the negative relation between disproportionate insider control and the FERC is weaker when institutional ownership is high and when managers provide more disclosure (i.e., greater disaggregation in mandatory reports, voluntary management guidance, and voluntary Form 8-K filings). Collectively, our findings reveal that although agency conflicts inherent in dual-class firms weaken the information environment, bonding and monitoring achieved via more disclosure and a more sophisticated investor base can help to alleviate agency problems arising from disproportionate insider control while allowing firms to take advantage of the benefits that a dual-class ownership structure affords.
Keywords: Future earnings response coefficient (FERC), agency costs, disproportionate insider control, dual-class ownership, ownership structure
JEL Classification: M4, M41
Suggested Citation: Suggested Citation