The Quality of Earnings Information in Dual-Class Firms: Persistence and Predictability

A dual-class firm structure, in which one class of shares confers more votes per share than the other, creates a gap between voting rights and cash flow rights. In this paper, we examine the quality of the financial reports of dual- versus single-class firms publicly traded in the U.S. over the 2012-2017 period, as measured by persistence and predictive ability of earnings and cash flows. The results are based on comprehensive information from financial statements analyzed using across-sample and within-sample tests. An additional external indicator of financial restatement filings is also used to support the results. The findings demonstrate that the quality of financial reports is higher for dual-class firms than for single-class firms and increases over time. This suggests that the freedom from market pressures is stronger than agency costs, encouraging founders to provide investors with higher-quality information in exchange for superior voting rights. The results uncover important and counterintuitive evidence about the existence of a tradeoff between the dilution of voting rights and enhancement of the credibility of information provided to investors.