Abstract
This study evaluates whether dual holdings report less conservatively than non-dual holdings. We define dual holdings as firms who have at least one shareholder who is a creditor simultaneously and hypothesize that this governance structure mitigates information asymmetries and therefore the agency conflict of debt. Hence, we assume that governance structures act as substitutes for agency conflict reducing measures like accounting conservatism. Dual holding structures therefore offer a unique even though never used before opportunity to evaluate the impact of information asymmetries on firms’ capital and agency costs as well as the bid-ask spreads and the market valuation. Our sample is based on US-American data and combines several databases who have not been linked before to aggregate 13,483 firm-year observations from 1998-2014.Our modified model based on Basu (1997) shows that dual holdings indeed report significantly less conservative than non-dual holdings. This result is robust to stricter definitions of dual-holdings. We further apply widely accepted models by El Ghoul et al. (2011), Gompers, Ishii, and Metrick (2010) and Coller and Yohn (1997) to give evidence for lower degrees of information asymmetry in dual holding firms by showing that bid-ask spreads are narrower, cost of capital is lower and the market evaluation measured as Tobin’s Q is higher for firms with this special governance structure. These consistent findings confirm our hypothesis that governance structures act as substitutes for agency conflict reducing measures. These insights are particularly beneficial for financial analysts, investors and all other readers of quarterly and annual reports.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.