Disproportionate Insider Control and the Informativeness of Stock Returns about Future Earnings

55 Pages Posted: 5 May 2021 Last revised: 12 Sep 2022

See all articles by Jason Bangert

Jason Bangert

University of Cincinnati - Lindner College of Business

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management

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

Bangert, Jason and Myers, Linda A. and Schmardebeck, Roy, Disproportionate Insider Control and the Informativeness of Stock Returns about Future Earnings (April 30, 2021). Available at SSRN: https://ssrn.com/abstract=3837651 or http://dx.doi.org/10.2139/ssrn.3837651

Jason Bangert

University of Cincinnati - Lindner College of Business ( email )

Cincinnati, OH 45221-0211
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN 37996
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
120
Abstract Views
649
Rank
419,528
PlumX Metrics