Agency Costs or Accrual Quality: What Do Investors Care More About When Valuing a Dual Class Firm?

Abstract

We study the effect of ownership structure on the informativeness of a firm’s earnings as capitalized in stock prices and returns. We hypothesize that informativeness of earnings is decreasing in dual class ownership structure due to purported higher agency costs at dual class firms compared to their single class counterparts even though dual class firms have relatively higher accrual quality. We find evidence consistent with our expectations that investors care more about agency costs than the quality of accruals in evaluating the earnings of dual class firms. Specifically, we find that current annual returns of the firm are negatively associated with dual class ownership structure and earnings informativeness is also decreasing in dual class ownership of the firm.