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

70 Pages Posted: 5 May 2021

See all articles by Jason Bangert

Jason Bangert

University of Tennessee, Knoxville - Haslam 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 period 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.

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 Tennessee, Knoxville - Haslam College of Business ( email )

Knoxville, TN
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 )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
52
Abstract Views
259
rank
471,374
PlumX Metrics